UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the fiscal year ended December 31, 2002 or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from__________ to __________.
Commission file number 2-89283
IOWA FIRST BANCSHARES CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
An Iowa Corporation 42-1211285
- ------------------------------- -----------------------------------------------
(State or other jurisdiction of (I.R.S. Employer incorporation or organization)
Identification No.)
300 East Second Street, Muscatine, Iowa 52761
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (563) 263-4221
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) [ ] Yes [ X ] No
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant, based upon the last known price at which the
common equity was sold, as of the last business day of the registrant's most
recently completed second fiscal quarter was $27,688,776. As of February 28,
2003, 1,424,445 shares of the Registrant's common stock were outstanding.
Documents incorporated by reference:
Part III of Form 10-K - Proxy statement for annual meeting of stockholders to be
held in April 2003.
1
ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS
General. Iowa First Bancshares Corp. (the "Company"), is a bank holding company
headquartered in Muscatine, Iowa. The Company owns all the outstanding stock of
two national banks in Iowa, First National Bank of Muscatine and First National
Bank in Fairfield. Both banks are members of the Federal Reserve System with
depository accounts insured to the maximum amount permitted by law by the
Federal Deposit Insurance Corporation.
On a full-time equivalent basis, year-end employment for the Company and its
subsidiary banks totaled 131 employees. No one customer accounts for more than
3% of revenues, loans, or deposits.
First National Bank of Muscatine has a total of five locations in Muscatine,
Iowa (see Item 2 - Properties for a discussion of branch location changes in
process for the Muscatine bank). The First National Bank in Fairfield has two
locations in Fairfield, Iowa. Each bank is engaged in the general commercial
banking business and provides full service banking to individuals and
businesses, including checking, savings, money market and time deposit accounts,
commercial loans, consumer loans, real estate loans, safe deposit facilities,
transmitting of funds, trust services, and such other banking services as are
usual and customary for commercial banks. Some of these other services include
sweep accounts, lock-box deposits, debit cards, credit-related insurance,
internet banking, automated teller machines, telephone banking, and brokerage
services through a third-party arrangement. The Company also owns the
outstanding stock of Iowa First Capital Trust I, which was capitalized in March
2001 for the purpose of issuing Company obligated mandatorily redeemable
preferred securities. See Footnote 9 on page 47 of this Form 10-K for further
discussion of these preferred securities.
The Company's primary business consists of attracting deposits from the public
or wholesale funding sources and investing those deposits and other funds in
loans and securities. The Company's results of operations are dependent
principally on net interest income, which is the difference between the interest
earned on its loans and securities and the interest paid on deposits and other
borrowings. Its operating results are affected by deposit service charge fees,
trust fees, revenue from other services provided and other income. Operating
expenses include employee compensation and benefits, occupancy and equipment
expense, data processing costs, advertising and business promotion expenses as
well as other general and administrative expenses. The Company's operating
results are also affected by economic and competitive conditions, especially
changes in interest rates, governmental policies and actions taken by regulatory
authorities.
Competition. The commercial banking business is highly competitive. Subsidiary
banks compete not only with other commercial banks, savings banks, mortgage
banking companies, credit unions and mutual funds, but also, insurance
companies, finance companies, brokerage firms, and a variety of other financial
services and advisory companies. Many of these competitors are not subject to
the same regulatory restrictions or requirements as banks and bank holding
companies. Many of the unregulated competitors compete across geographic
boundaries and provide customers access to attractive alternatives to banking
services. These competitive trends are likely to continue and may well increase.
The financial services industry is also subject to more competition as a result
of future technological advances which may assist more companies to provide
financial services.
Regulation. The operations of the Company and its subsidiary banks are affected
by state and federal legislative changes and by policies of various regulatory
authorities. The Company is a registered bank holding company under the Bank
Holding Company Act of 1956 (the "Act") and is subject to the supervision of,
and regulation by, the Board of Governors of the Federal Reserve System (the
"Board"). Under the Act, a bank holding company may engage in banking, managing
or controlling banks, furnishing or performing services for banks it controls,
and conducting activities that the Board has determined to be closely related to
banking.
National banks are subject to the supervision of, and are examined by, the
Office of the Comptroller of the Currency. Both subsidiary banks of the Company
are members of the Federal Deposit Insurance Corporation, and as such, are
subject to examination thereby. In practice, the primary federal regulator makes
regular examinations of each subsidiary bank subject to its regulatory review or
participates in joint examinations with other federal regulators. Areas subject
to regulation by these authorities include capital levels, the allowance for
possible loan losses, investments, loans, mergers, issuance of securities,
payment of dividends, establishment of branches, and many other aspects of
operations.
2
Statistical information called for by this Item is contained in the Company's
2002 Annual Report to Shareholders which is incorporated by reference.
ITEM 2. PROPERTIES
Since the Company commenced business, its principal executive office has been
located at 300 East Second Street, Muscatine, Iowa, which is the principal
office of First National Bank of Muscatine, a national banking association and a
wholly-owned subsidiary of the Company.
First National Bank of Muscatine conducts its operations from five facilities
located in Muscatine. The main bank is located at 300 East Second Street and is
a modern brick and steel building completed in 1979 containing 36,000 square
feet of floor space on three floors. The bank owns both the building and the
underlying real estate. All administrative and many sales functions of the bank
are conducted at its main office. Portions of the building are leased to
commercial tenants. A substantial remodeling of the main floor of the downtown
Muscatine primary bank building is nearly complete.
During 1997, a branch was opened inside the then new Wal-Mart Supercenter
located on Highway 61 at Muscatine. This branch and the Wal-Mart Supercenter
were the first of their kind in Iowa. The bank operates this branch under a
five-year lease agreement with Wal-Mart, with two five-year renewal options.
Additionally, another new branch facility, which includes drive-through banking
services and is located across the alley from the main Muscatine banking
headquarters, was completed in the fall of 1997. This branch replaced a previous
downtown branch. The bank owns this facility and the underlying real estate.
The bank's Southside office at 608 Grandview Avenue is located two miles
southwest of the main bank. The office contains 3,600 square feet of floor space
and is located in a one-story steel frame, concrete block building. The facility
offers a walk-in lobby and three drive-up lanes. The building and underlying
real estate are owned by the bank. Portions of the building are leased to
commercial tenants.
The Company plans to enhance its market presence in Muscatine, Iowa with a new
branch. This branch will be located on a major thoroughfare and retail area,
Highway 61, on the northeast side of Muscatine. The branch will offer a wide
variety of banking services in its 3,000 square feet of space. In addition to
consumer and real estate lending services, a traditional inside four-person
teller line and four drive-up teller lanes, the branch will also offer
freestanding twenty-four hour ATM services. Construction of this branch is
anticipated to be completed in the third quarter of 2003. The building and
underlying real estate are owned by the bank.
The new branch discussed above will serve as a replacement for the current
rented branch facilities at the Muscatine Mall, approximately two miles
northeast of the main downtown bank building. In recent years, the Muscatine
Mall has lost numerous tenants resulting in lower customer traffic counts. The
current space allocated to our bank has been deemed inadequate by the Company to
properly serve the long-term needs of our customers. Thus, the Company decided
to build its own branch in the strong and growing retail section of town
described above.
The current office at the Muscatine Mall, a one-story concrete and steel
building, is approximately two miles northeast of the main bank. The facility
offers a walk-in lobby and night depository. The two-lane, mobile drive-up
facility of this branch is located approximately 100 feet west of the branch at
the parking lot of the mall. The building, drive-up facility and real estate are
leased. The terms of the leases provide for monthly payments of $3,465. These
facilities will be vacated by the bank upon completion of the new Highway 61
branch.
First National Bank in Fairfield conducts its operations from a modern brick and
steel building completed in 1968 containing 8,200 square feet of floor space on
two floors. The bank owns both the building and the underlying real estate.
Portions of the building are leased to commercial tenants. A three-lane drive-up
facility is located at the main bank. In the spring of 1997, a new 2,500 square
foot branch facility was opened at Fairfield, Iowa. The building, which is
located in a high traffic area in front of the local Wal-Mart store on Highway
34, contains several private offices for lending staff and management as well as
teller and deposit services, including several drive-through lanes.
After completion and occupancy of the Highway 61 branch, management believes all
facilities will be of sound construction, in good operating condition, and are
adequately equipped for carrying on the business of the Company.
3
ITEM 3. LEGAL PROCEEDINGS
The Company has no pending legal proceedings which are material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the stockholders of the Company for a vote
during the fourth quarter of 2002.
4
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The brokerage firms of Howe Barnes Investments, Inc. and Sandler O'Neill &
Partners, L.P. make a market for the Company's common stock. Iowa First
Bancshares Corp. common stock is traded on the over-the-counter bulletin board
market under the symbol "IFST". As of February 28, 2003, there were 1,424,445
shares of the common stock outstanding.
High and low common stock prices and dividends paid for the last two years were:
2002 by Dividend
Quarters High Low Per Share
- --------------------------------------------------------------------------------
First .................................. $22.50 $20.40 $0.2275
Second ................................. 25.00 21.70 0.2275
Third .................................. 25.25 23.30 0.2275
Fourth ................................. 25.00 24.16 0.2275
Total dividends paid ................... $ 0.91
2001 by Dividend
Quarters High Low Per Share
- --------------------------------------------------------------------------------
First .................................. $23.75 $19.13 $ 0.22
Second ................................. 22.60 18.88 0.22
Third .................................. 21.75 19.75 0.22
Fourth ................................. 22.50 20.10 0.22
Total dividends paid ................... $ 0.88
The above quotations were furnished by the brokerage firms that serve as market
makers for the Company's stock. The quotations represent prices between dealers
and do not include retail markup, markdown, or commissions.
Future dividends are dependent on future earnings, regulatory restrictions (see
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of this Form 10-K; and Note 10 to the Company's Consolidated
Financial Statements in the Company's 2002 Annual Report to Shareholders),
capital requirements, and the Company's financial condition.
As of February 28, 2003, the Company had approximately 350 shareholders of its
outstanding class of common stock. The Iowa First Bancshares Corp. Employee
Stock Ownership Plan with 401(k) Provisions is considered one shareholder as all
shares owned by this plan are voted by the trustees of said plan unless the vote
in question encompasses approval or disapproval of any corporate merger,
consolidation, dissolution, or similar transaction.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Consolidated Financial Data" of Iowa First Bancshares Corp. set
forth on the following page is derived in part from, and should be read in
conjunction with, our consolidated financial statements and the accompanying
notes thereto. See Item 8 "Financial Statements and Supplementary Data." Results
for past periods are not necessarily indicative of results to be expected for
any future period.
5
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
BALANCE SHEET (at year-end) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Net loans ...................................... $273,922,000 $272,695,000 $270,539,000 $266,992,000 $250,318,000
Allowance for loan losses ...................... 3,304,000 3,182,000 3,268,000 3,091,000 2,787,000
Deposits and securities sold under
agreements to repurchase ..................... 277,013,000 272,592,000 275,430,000 274,198,000 267,491,000
Federal Home Loan Bank advances ................ 64,609,000 70,706,000 71,531,000 64,621,000 47,973,000
Total assets ................................... 378,705,000 380,597,000 380,414,000 371,029,000 345,411,000
Redeemable common stock held by KSOP ........... 2,717,000 2,242,000 2,118,000 2,507,000 2,845,000
Stockholders' equity ........................... 24,313,000 23,040,000 21,632,000 18,686,000 17,464,000
STATEMENT OF INCOME (for the year)
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income ............................ $ 11,601,000 $ 10,876,000 $ 11,495,000 $ 11,290,000 $ 10,691,000
Provision for loan losses ...................... 440,000 366,000 429,000 406,000 125,000
Other income ................................... 2,664,000 2,800,000 2,237,000 1,967,000 1,822,000
Other operating expenses ....................... 8,711,000 8,477,000 8,144,000 7,887,000 7,580,000
Income before income taxes ..................... 5,114,000 4,833,000 5,159,000 4,964,000 4,808,000
Income taxes ................................... 1,544,000 1,433,000 1,599,000 1,552,000 1,526,000
Net income ..................................... 3,570,000 3,400,000 3,560,000 3,412,000 3,282,000
PER SHARE DATA
- -------------------------------------------------------------------------------------------------------------------------------
Net income, basic and diluted .................. $ 2.48 $ 2.30 $ 2.34 $ 2.23 $ 2.02
Book value at year-end ......................... 17.07 15.82 14.34 12.16 11.40
Stock price at year-end (greater of bid or
appraised price) ............................. 26.50 22.25 22.00 27.00 31.00
Cash dividends declared during the year ........ 0.92 0.89 0.85 0.84 0.84
Cash dividends declared as a percentage
of net income ................................ 37% 39% 36% 38% 42%
KEY RATIOS
- -------------------------------------------------------------------------------------------------------------------------------
Return on average assets ....................... 0.93% 0.90% 0.97% 0.96% 1.00%
Return on average stockholders' equity ......... 14.87 14.96 17.76 18.81 15.90
Net interest margin-tax equivalent ............. 3.39 3.24 3.49 3.53 3.65
Average stockholders' equity to average
assets ....................................... 6.28 6.01 5.44 5.08 6.26
Total regulatory capital to risk-weighted assets 12.37 11.77 10.04 9.52 9.14
Efficiency ratio (all operating expenses,
excluding the provision for loan losses,
divided by the sum of net interest income
and other income) ............................ 61.07 61.98 59.30 59.49 60.58
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides additional information regarding our
operations for the years ended December 31, 2002, 2001 and 2000, and financial
condition for the years ended December 31, 2002 and 2001. This discussion should
be read in conjunction with "Selected Consolidated Financial Data" and our
consolidated financial statements and the accompanying notes thereto included
elsewhere in this document.
Iowa First Bancshares Corp. (Company) is a bank holding company providing bank
and bank related services through its wholly-owned subsidiaries, First National
Bank of Muscatine (Muscatine), First National Bank in Fairfield (Fairfield), and
Iowa First Capital Trust I.
Total average assets of the Company increased 1.2% in 2002, 2.6% in 2001, and
3.1% in 2000. The distribution of average assets, liabilities and stockholders'
equity and interest rates, and interest differential was as follows (dollar
amounts in thousands and income and rates on a fully taxable equivalent basis
using statutory tax rates in effect for the year presented):
2002 2001 2000
---------------------------- --------------------------- ----------------------------
Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------- --------------------------- ----------------------------
Taxable loans, net ..................... $273,980 $ 19,533 7.13% $274,558 $ 21,909 7.98% $270,116 $ 22,815 8.45%
Taxable investment securities
available for sale ................... 22,312 1,171 5.25 32,116 2,034 6.33 43,293 2,748 6.35
Nontaxable investment securities
and loans ............................ 19,880 1,442 7.25 21,588 1,574 7.29 22,086 1,677 7.59
Federal funds sold ..................... 35,062 533 1.52 18,807 645 3.43 6,154 385 6.26
Restricted investment securities ....... 3,911 117 2.99 3,824 171 4.47 3,668 251 6.84
Interest-bearing deposits at
financial institutions ............... 1,880 71 3.78 948 44 4.64 -- -- --
-----------------------------------------------------------------------------------------
Total interest-
earning assets ................. 357,025 22,867 6.40 351,841 26,377 7.50 345,317 27,876 8.07
-------- -------- --------
Cash and due from banks ................ 13,159 12,042 12,006
Bank premises and equipment, net ....... 5,071 5,029 5,203
Life insurance contracts ............... 3,682 3,275 1,484
Other assets ........................... 3,568 5,745 4,371
-------- -------- --------
Total .......................... $382,505 $377,932 $368,381
======== ======== ========
LIABILITIES
Deposits:
Interest-bearing demand .............. $115,753 $ 1,514 1.31% $ 98,499 $ 2,497 2.53% $ 94,940 $ 3,281 3.46%
Time ................................. 115,267 4,413 3.83 131,735 7,340 5.57 128,378 7,345 5.72
Notes payable .......................... 4,160 307 7.38 5,769 424 7.35 6,431 482 7.50
Other borrowings ....................... 73,883 4,129 5.59 71,930 4,392 6.11 73,802 4,703 6.37
Company obligated mandatorily
redeemable preferred securities ...... 4,000 413 10.32 3,033 313 10.32 -- -- --
-------------------- ------------------- -------------------
Total interest-
bearing liabilities ............ 313,063 10,776 3.44 310,966 14,966 4.81 303,551 15,811 5.21
-------- -------- --------
Noninterest-bearing deposits ........... 41,128 39,461 40,685
Other liabilities ...................... 1,828 2,665 1,783
-------- -------- --------
Total liabilities .............. 356,019 353,092 346,019
--------- -------- --------
Redeemable common stock
held by KSOP ......................... 2,480 2,118 2,312
--------- -------- --------
STOCKHOLDERS' EQUITY ................... 24,006 22,722 20,050
-------- -------- --------
Total .......................... $382,505 $377,932 $368,381
======== ======== ========
Net interest earnings .................. $ 12,091 $ 11,411 $ 12,065
======== ======== ========
Net yield (net interest earnings
divided by total interest-
earning assets) ................ 3.39% 3.24% 3.49%
===== ===== =====
Nonaccruing loans are included in the average balance. Loan fees are not
material.
7
The net interest margin increased in 2002 (from 3.24% in 2001 to 3.39% in 2002).
The return on average interest-earning assets decreased 110 basis points (from
7.50% in 2001 to 6.40% in 2002) and interest paid on average interest-bearing
liabilities decreased 137 basis points (from 4.81% in 2001 to 3.44% in 2002).
Average interest-earning assets to total assets rose in 2002 to 93.3% from 93.1%
in 2001. The Federal Reserve Bank Board and Chairman Greenspan continued, albeit
at a much slower pace than 2001, to decrease short-term interest rates during
2002. The prime lending rate, which began the year at 4.75%, ended 2002 at
4.25%.
During this period of low interest rates, increased emphasis has been given to
incorporating interest rate floors on selected commercial and agricultural
loans. During 2002 most, if not all, of such loans subject to interest rate
floors were actually paying the floor rate. This resulted in the rates received
on loans falling less than the rates paid on interest-bearing liabilities.
Eventually, when market interest rates again rise, rates paid on
interest-bearing liabilities may, for a time, increase more than rates received
on loans. This outcome is possible due to the loans which are subject to floor
rate pricing lagging market interest rate increases until such time as the floor
rate has been exceeded. The extent of this impact will depend on the amount and
timing of eventual market interest rate hikes.
The net interest margin decreased in 2001 (from 3.49% in 2000 to 3.24% in 2001).
The return on average interest-earning assets decreased 57 basis points (from
8.07% in 2000 to 7.50% in 2001) and interest paid on average interest-bearing
liabilities decreased 40 basis points (from 5.21% in 2000 to 4.81% in 2001).
Average interest-earning assets to total assets declined in 2001 to 93.1% from
93.7% in 2000. The Federal Reserve Bank Board and Chairman Greenspan decreased
short-term interest rates an amazing 11 times during 2001. The prime lending
rate, which began the year at 9.5%, ended 2001 at only 4.75%. This dramatic
reduction in interest rates was a major contributing factor to the decline in
the net interest margin.
CRITICAL ACCOUNTING POLICY:
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. As the Company adds new products and increases the complexity
of its loan portfolio, it will enhance its methodology accordingly. Management
may report a materially different amount for the provision for loan losses in
the statement of operations to change the allowance for loan losses if its
assessment of the above factors were different. This discussion and analysis
should be read in conjunction with the Company's financial statements and the
accompanying notes presented elsewhere herein, as well as the portion of this
Management's Discussion and Analysis section entitled "Financial Condition -
Allowance for Loan Losses". Although management believes the levels of the
allowance as of both December 31, 2002 and 2001 were adequate to absorb losses
inherent in the loan portfolio, a decline in local economic conditions, or other
factors, could result in increasing losses that cannot be reasonably predicted
at this time.
FINANCIAL CONDITION:
Total assets of Iowa First Bancshares Corp. decreased by $1,892,000 or one-half
of one percent when comparing December 31, 2002 and December 31, 2001 balances.
On average for the year 2002 assets increased $4,573,000 or 1.2%.
8
Cash, Interest-Bearing Deposits, and Federal Funds Sold
Cash and due from banks increased by $2,622,000 or 17.9% to $17,283,000 at
December 31, 2002, from $14,661,000 at December 31, 2001. Cash and due from
banks represented both cash maintained at the Banks, as well as funds that the
Banks had deposited in other banks in the form of demand deposits.
Interest-bearing deposits at financial institutions increased $171,000 or 10.6%
to $1,791,000 at December 31, 2002, from $1,620,000 at December 31, 2001. These
deposits are primarily certificates of deposit at financial institutions with
the balance held at any individual bank maintained to not exceed the insurance
limits provided by the Federal Deposit Insurance Corporation (FDIC). Some of
these funds may also be held in interest-bearing demand accounts at various
banking institutions.
Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold
decreased $400,000 or 1.3% to $30,600,000 at December 31, 2002, from $31,000,000
at December 31, 2001. As of December 31, 2002, federal funds sold represented
8.1% of total assets. These federal funds can be used to fund future loan
demand, deposit or other liability outflows, investment securities purchases, or
various other purposes as identified by management.
Investment Securities
All the Banks' securities are maintained in the available for sale category as
the securities may be liquidated to provide cash for operating, investing, or
financing purposes. These securities are reported at fair value. Investment
securities decreased $6,371,000 or 14.3% to $38,095,000 at December 31, 2002,
from $44,466,000 at December 31, 2001. The amortized cost of such securities at
December 31, 2002 and December 31, 2001 was $36,339,000 and $43,099,000,
respectively. The net decrease was the result of a number of transactions in the
securities portfolio. The Banks purchased additional available for sale
securities totaling $9,520,000 and recognized a net increase in unrealized gains
on securities available for sale before applicable income tax of $389,000. This
was more than offset by $4,013,000 of securities sales and $12,307,000 of
paydowns, maturities, and calls. Additionally, the investment securities
portfolio realized net gains of $84,000 during 2002 and net premium amortization
of $44,000.
Rates received on investment securities available for sale have decreased less
than the rates paid on interest-bearing liabilities. This was due largely to a
longer average duration for investment securities available for sale than the
average duration for interest-bearing liabilities. Most of the investment
securities available for sale were purchased when market interest rates were
higher than rates currently available. In the current interest rate environment,
when such investment securities mature or are sold, called, or otherwise paid
down, the reinvestment rate available is nearly always lower than the yield of
the liquidating security.
Investment securities as of December 31, 2002 were approximately 0% U.S.
Treasury securities, 48% U.S. government agency securities, 1% mortgage-backed
securities, 44% state and political subdivisions, and 7% corporate obligations.
During 2002, management again focused the investment securities portfolio in the
U.S. government agency as well as state and political subdivisions categories.
These investment types earn a "spread" over U.S. Treasury securities thus
offering an opportunity to increase after-tax income. The year 2002 experienced
continuing market interest rate reductions with rates as low as any time in
several decades. In an effort to prudently maintain a competitive yield in the
investment portfolio, over 92% of the total portfolio was invested in relatively
highly rated U.S. government agency securities and state and political
subdivisions. Additionally, to increase total return of the investment
portfolio, 7% was invested in corporate obligations, which was less than the
prior year in recognition of the greater credit and event risk of such
securities, especially during the current challenging economic times.
Investment securities as of December 31, 2001 were approximately 3% U.S.
Treasury securities, 41% U.S. government agency securities, 1% mortgage-backed
securities, 42% state and political subdivisions, and 13% corporate obligations.
During 2001, management again focused the investment securities portfolio in the
U.S. government agency as well as state and political subdivisions categories.
These investment types earn a "spread" over U.S. Treasury securities thus
offering an opportunity to increase after-tax income. The year 2001 was marked
by tremendous market interest rate reductions. In an effort to prudently
maintain a competitive yield in the investment portfolio, over 80% of the total
portfolio was invested in relatively highly rated U.S. government agency
securities and state and political subdivisions. Additionally, to increase total
return of the investment portfolio, 13% was invested in corporate obligations,
with the concomitant credit and event risk.
9
Investment securities as of December 31, 2000 were approximately 10% U.S.
Treasury securities, 46% U.S. government agency securities, 2% mortgage-backed
securities, 34% state and political subdivisions, and 8% corporate obligations.
During 2000, management focused the investment securities portfolio in the U.S.
government agency as well as state and political subdivisions categories. These
investment types are relatively safe investments which earn a reasonable
after-tax return.
The fair value of investment securities available for sale at the date indicated
are summarized as follows (dollar amounts in thousands):
December 31,
--------------------------------
2002 2001 2000
---------------------------------
U.S. Treasury ........................... $ -- $ 1,533 $ 6,036
U.S. government agencies ................ 18,242 18,119 29,315
Mortgage-backed securities .............. 281 640 1,299
State and political subdivisions ........ 16,769 18,478 21,245
Corporate obligations ................... 2,803 5,696 5,164
---------------------------------
$38,095 $44,466 $63,059
=================================
The following table shows the maturities of investment securities available for
sale at December 31, 2002 and the weighted average yields of such securities
(dollar amounts in thousands):
After One, But After Five, But After Ten Years
Within One Year Within Five Years Within Ten Years or Nonmaturing
Amount Yield Amount Yield Amount Yield Amount Yield
-----------------------------------------------------------------------------
U.S. Treasury .................. $ -- --% $ -- --% $ -- --% $ -- --%
U.S. government agencies ....... 5,590 4.07 10,104 5.52 2,548 4.30 -- --
Mortgage-backed securities ..... 52 7.14 229 5.87 -- -- -- --
State and political subdivisions 1,814 6.85 6,716 7.33 5,833 7.81 2,406 7.57
Corporate obligations .......... 1,022 7.19 1,781 7.07 -- -- -- --
------- ------- ------- -------
$ 8,478 $18,830 $ 8,381 $ 2,406
======= ======= ======= =======
The weighted average yields in the previous table are calculated on the basis of
the carrying value and effective yields weighted for the scheduled maturity of
each security. Weighted average yields on tax-exempt securities have been
computed on a fully taxable equivalent basis using the federal statutory tax
rate of 34%, the rate in effect for the year ended December 31, 2002, and
excluding the interest expense allocated to carry certain tax-exempt securities.
The Company does not use any financial instruments referred to as derivatives to
manage interest rate risk and as of December 31, 2002, no investment in a single
security, other than U.S. government agency securities, exceeded 10% of
stockholders' equity.
Loans
Loans outstanding at December 31, 2002 increased $1,349,000 or 0.5% from
December 31, 2001. This increase was the result of loan origination and
purchases exceeding loan repayments, sales, and net loan charge-offs.
The amounts of loans outstanding at the indicated dates is shown in the
following table according to the type of loans (dollar amounts in thousands):
December 31,
----------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------
Commercial ..................... $109,045 $106,286 $103,340 $101,079 $ 94,724
Agricultural ................... 28,185 27,926 28,000 27,810 26,685
Real estate, construction ...... 6,051 7,752 4,055 3,708 2,598
Real estate, mortgage .......... 113,295 110,931 109,557 105,068 95,535
Tax exempt, real estate mortgage 3,297 1,290 2,050 2,581 2,337
Installment .................... 17,118 21,401 26,611 29,774 31,126
Other .......................... 235 291 194 63 100
----------------------------------------------------
$277,226 $275,877 $273,807 $270,083 $253,105
====================================================
10
The following loan categories outstanding at December 31, 2002 mature as follows
(dollar amounts in thousands):
After One
Year, But
Amount One Year Within After
of Loans or Less Five Years Five Years
--------------------------------------------
Commercial ..................... $109,045 $ 38,906 $ 60,659 $ 9,480
Agricultural ................... 28,185 13,727 9,700 4,758
Real estate, construction ...... 6,051 3,840 2,211 --
--------------------------------------------
$143,281 $ 56,473 $ 72,570 $ 14,238
============================================
The interest rates on the amount due after one year that are fixed or adjustable
are as follows (dollar amounts in thousands):
Fixed Adjustable
------------------------
Commercial ................................... $55,281 $14,858
Agricultural ................................. 13,924 534
Real estate, construction .................... 2,165 46
------------------------
$71,370 $15,438
========================
During 2002 commercial loans increased by $2,759,000 or 2.6%, agricultural loans
increased $259,000 or .9%, construction real estate loans decreased by
$1,701,000 or 21.9%, mortgage real estate loans increased by $2,364,000 or 2.1%,
tax exempt real estate mortgage loans increased by $2,007,000 or 156%, and
installment and other loans decreased by $4,339,000 or 20.0%. Overall loan
growth totaled $1,349,000 or 0.5%. The reduction in installment loans is largely
attributable to very low, including 0%, financing of new automobiles by the
financing arms of the major auto companies. Additionally, national financial
companies offer rates and other terms which our management believes would be
imprudent to match. Management continues to search for quality growth in all
loan categories while remaining vigilant in maintaining high credit standards.
The Company sells some real estate loans to the secondary market resulting in
increased fee income and reduced interest rate risk. These sales of real estate
loans, net of any gains recognized upon sale, totaled $20,415,000, $8,209,000,
and $2,095,000 for the years ended December 31, 2002, 2001, and 2000,
respectively. As of December 31, 2002, the Company's general legal lending limit
was approximately $5,458,000. For loans collateralized by marketable securities,
the total legal limit was approximately $9,098,000 as of December 31, 2002.
Loan Risk Elements Nonaccrual, Past Due and Restructured Loans
The following table presents information concerning the aggregate amount of
nonperforming loans. Nonperforming loans comprise (a) loans accounted for on a
nonaccrual basis; (b) accruing loans contractually past due 90 days or more as
to interest or principal payments (but not included in the nonaccrual loans in
(a) above); and (c) other loans whose terms have been renegotiated to provide a
reduction or deferral of interest or principal because of a deterioration in the
financial position of the borrower (exclusive of loans in (a) or (b) above)
(dollar amounts in thousands):
December 31,
------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------
Loans accounted for on a nonaccrual basis ...... $1,730 $ 640 $ 785 $ 503 $ 657
Accrual loans contractually past due
90 days or more .............................. 1,053 128 96 49 346
Loans whose terms have been renegotiated to
provide a reduction or deferral of interest or
principal because of a deterioration in the
financial position of the borrower ........... -- -- -- -- --
11
Total nonaccrual loans were $1,730,000 at December 31, 2002, an increase of
$1,090,000 or 170% from December 31, 2001. Total nonaccrual and accrual loans
contractually past due 90 days or more were $2,783,000 at December 31, 2002, an
increase of $2,015,000 or 262.4% from a year earlier. Compared to the average
over the past five years, nonaccrual loans at December 31, 2002 were $867,000 or
100.5% more than average. Total nonaccrual and accrual loans contractually past
due 90 days or more were $1,586,000 or 132.5% higher at December 31, 2002 than
the average for these categories over the past five years.
When the full collectibility of principal or interest on any loan is considered
doubtful, previously accrued but uncollected interest remains as accrued if the
principal and interest is protected by sound collateral value based upon a
current independent, qualified appraisal. In practice, in the vast majority of
cases, the interest accrued but uncollected on loans transferred to nonaccrual
status is charged-off at the time of transfer. Interest in the amounts of
$100,000, $63,000, and $47,000, would have been earned on the nonaccrual loans
had they been performing loans in accordance with their original terms during
2002, 2001, and 2000, respectively. The interest collected on loans designated
as nonaccrual loans and included in income for the years ended December 31,
2002, 2001, and 2000 was $30,000, $57,000, and $14,000, respectively.
As of December 31, 2002, the Company had loans totaling $7,783,000 in addition
to those listed as nonaccrual, past due or renegotiated that were identified by
the Banks' internal asset rating systems as classified assets. This represents a
$2,291,000 or 22.8% decrease from 2001. The Company is not aware of any single
loan or group of loans, other than these and those reflected above, of which
full collectibility cannot reasonably be expected. Management has committed
resources and is focusing its attention on efforts designed to control the
amount of classified assets. The Company has $28,185,000 in total agricultural
loans outstanding. The Company does not have any other substantial portion of
its loans concentrated in one or a few industries nor does it have any foreign
loans outstanding as of December 31, 2002. The Company's loans are heavily
concentrated geographically in the Iowa counties of Muscatine and Jefferson.
In general, the agricultural loan portfolio risk is dependent on factors such as
governmental policies, weather conditions, agricultural commodities prices,
marketing strategies and timing, as well as the mix of grain and livestock
raised. Commercial loan risk can also vary widely from period to period and is
particularly sensitive to changing business and economic conditions as well as
governmental policies. Consumer (installment and real estate mortgage) loan risk
is substantially influenced by employment opportunities in the markets served by
the Company. The national, regional, State of Iowa, and Counties of Muscatine
and Jefferson economic activity and success levels dramatically influence the
risk in each of the loan portfolios.
Other real estate owned was $503,000, $251,000, and $101,000 as of December 31,
2002, 2001, and 2000, respectively.
Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in the
form of provisions for loan losses. Loan losses or recoveries are charged or
credited directly to the allowance for loan losses. The provision for loan
losses is determined based upon an evaluation of a number of factors by
management of the Banks including (i) loss experience in relation to outstanding
loans, loan delinquencies, and the existing level of the allowance for loan
losses, (ii) a continuing review of problem loans and overall portfolio
composition and quality, (iii) regular examinations and appraisals of loan
portfolios conducted by federal supervisory authorities, (iv) current and
expected economic conditions, and (v) other factors that, in management's
judgment, deserved evaluation in estimating loan losses. Management of the Banks
continues to review the loan portfolios and believes the allowance for loan
losses provides for losses that are probable as of December 31, 2002. However,
there can be no assurance that such losses will not exceed the estimated amounts
or that the Company will not be required to make additional provisions for loan
losses in the future. Asset quality is a constant priority for the Company and
its subsidiary banks. Should the already weak economic climate continue to
deteriorate, borrowers may experience difficulty, and the level of
non-performing loans, charge-offs, and delinquencies could rise thus requiring
further increases in the provision.
12
The Banks allocate the allowance for loan losses according to the amount deemed
to be necessary to provide for probable losses being incurred within the
categories of loans set forth in the table below. The amount of such components
of the allowance for loan losses and the ratio of loans in such categories to
total loans outstanding are as follows (dollar amounts in thousands):
2002 2001 2000 1999 1998
------------------ ------------------- ------------------ ------------------ -------------------
Allow- Allow- Allow- Allow- Allow-
ance Loans to ance Loans to ance Loans to ance Loans to ance Loans to
For Loan Total For Loan Total For Loan Total For Loan Total For Loan Total
Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans
----------------------------------------------------------------------------------------------------
Real estate loans:
Mortgage ....... $ 147 42.06% $ 111 40.68% $ 108 40.01% $ 99 38.90% $ 95 37.75%
Construction ... -- 2.18 -- 2.81 -- 1.48 -- 1.37 -- 1.03
Commercial ....... 1,337 39.33 1,321 38.53 1,982 37.74 1,935 37.42 1,787 37.42
Agricultural ..... 111 10.17 89 10.12 280 10.23 269 10.29 248 10.54
Installment ...... 1,709 6.18 1,661 7.76 898 9.72 788 11.04 657 12.30
Other ............ -- 0.08 -- 0.10 -- 0.82 -- 0.98 -- 0.96
--------------------------------------------------------------------------------------------------
$3,304 100.00% $3,182 100.00 $3,268 100.00% $3,091 100.00% $2,787 100.00%
==================================================================================================
Deposits
Total average deposits increased 1.0% in 2002, 2.2% in 2001, and decreased 0.2%
in 2000. The average deposits are summarized below (dollar amounts in
thousands):
2002 2001 2000
-----------------------------------------------------------
Average Average Average
Interest Interest Interest
Expense Expense Expense
Amount Percent Amount Percent Amount Percent
----------------- ------------------- ------------------
Noninterest-bearing demand $ 41,128 --% $ 39,461 --% $ 40,685 --%
Savings .................. 22,032 1.0 20,339 1.8 20,566 2.3
Interest-bearing demand .. 93,721 1.4 78,160 2.7 74,374 3.8
Time ..................... 115,267 3.8 131,735 5.6 128,378 5.7
-------- -------- --------
Total deposits ... $272,148 $269,695 $264,003
======== ======== ========
Included in interest-bearing time deposits are certificates of deposit with a
minimum denomination of $100,000, with scheduled maturities as follows (dollar
amounts in thousands):
Year Ended
December 31,
2002
------------
One to three months ...................................... $ 5,525
Three to six months ...................................... 2,920
Six to twelve months ..................................... 5,676
Over twelve months ....................................... 13,201
-------
$27,322
=======
13
RESULTS OF OPERATIONS:
Changes in Diluted Earnings Per Share
The increase in diluted earnings per share between 2002 and 2001 amounted to
$.18. The major sources of change are presented in the following table:
2002 2001
------------------
Net income per share, prior year ....................... $ 2.30 $ 2.34
------------------
Increase (decrease) attributable to:
Net interest income .................................. 0.50 (0.42)
Provision for loan losses ............................ (0.05) 0.04
Investment securities gains, net ..................... (0.17) 0.22
Other income ......................................... 0.08 0.17
Salaries and employee benefits ....................... (0.01) (0.10)
Other operating expenses ............................. (0.15) (0.13)
Income taxes ......................................... (0.08) 0.11
Change in average common shares outstanding .......... 0.06 0.07
------------------
Net change ..................................... 0.18 (0.04)
------------------
Net income per share, current year ............. $ 2.48 $ 2.30
==================
Net Interest Income
The following table sets forth a summary of the changes in interest earned and
paid resulting from changes in volume and rates. Changes attributable to both
rate and volume which cannot be segregated have been allocated to the change due
to volume (dollar amounts in thousands and income on a fully taxable equivalent
basis using statutory rates in effect for year presented):
Year Ended December 31, 2002 Year Ended December 31, 2001
----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
----------------------------- -----------------------------
Average Average Total Average Average Total
Balance Rate Change Balance Rate Change
--------------------------------------------------------------
Interest income:
Taxable loans ...................... $ (47) $ (2,329) $ (2,376) $ 384 $ (1,290) $ (906)
Taxable investment securities
available for sale ............... (622) (241) (863) (708) (6) (714)
Nontaxable investment
securities and loans ............. (124) (8) (132) (38) (65) (103)
Federal funds sold ................. 558 (670) (112) 792 (532) 260
Restricted investment securities ... 4 (58) (54) 10 (90) (80)
Interest-bearing deposits at
financial institutions ........... 43 (16) 27 44 -- 44
---------------------------------------------------------------
Total interest income ........ (188) (3,322) (3,510) 484 (1,983) (1,499)
---------------------------------------------------------------
Interest expense:
Interest-bearing demand deposits ... 429 (1,412) (983) 132 (916) (784)
Interest-bearing time deposits ..... (921) (2,006) (2,927) 193 (198) (5)
Notes payable ...................... (118) 1 (117) (49) (9) (58)
Other borrowings ................... 121 (384) (263) (79) (232) (311)
Company obligated mandatorily
redeemable preferred securities .. 100 -- 100 156 157 313
--------------------------------------------------------------
Total interest expense ....... (389) (3,801) (4,190) 353 (1,198) (845)
--------------------------------------------------------------
Change in net
interest earnings ............ $ 201 $ 479 $ 680 $ 131 $ (785) $ (654)
==============================================================
14
Nonaccruing loans are included in the average balance. Loan fees are not
material.
Provision for Loan Losses
The following table summarizes average loan balances at the end of each year;
changes in the allowance for loan losses arising from loans charged off and
recoveries on loans previously charged off by loan category; and the provisions
for loan losses which have been charged to operating expense (dollar amounts in
thousands):
Year Ended December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------
Balance of allowance for loan
losses at beginning of year ............. $ 3,182 $ 3,268 $ 3,091 $ 2,787 $ 2,604
-------------------------------------------------------------
Loans charged off:
Commercial and agricultural ............. 133 237 98 168 5
Mortgage ................................ 39 20 16 11 18
Installment ............................. 199 247 216 150 169
-------------------------------------------------------------
Total loans charged off ........... 371 504 330 329 192
-------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial and agricultural ............. 6 6 19 172 176
Mortgage ................................ -- -- 3 17 11
Installment ............................. 47 46 56 38 63
-------------------------------------------------------------
Total recoveries .................. 53 52 78 227 250
-------------------------------------------------------------
Net loans charged off (recovered) ......... 318 452 252 102 (58)
-------------------------------------------------------------
Provisions for loan losses charged
to operating expense .................... 440 366 429 406 125
-------------------------------------------------------------
Balance at end of year .................... $ 3,304 $ 3,182 $ 3,268 $ 3,091 $ 2,787
=============================================================
Average net loans outstanding ............. $ 276,454 $ 276,271 $ 272,425 $ 263,346 $ 231,016
Ratio of net loan charge-offs
(recoveries) to average net
loans outstanding ....................... 0.12% 0.16% 0.09% 0.04% (0.03%)
Allowance for loan losses as a
percentage of average net
loans outstanding ....................... 1.20 1.15 1.21 1.18 1.21
Coverage of net charge-offs by
year-end allowance for loan
losses .................................. 10.39 7.04 12.97 30.30 N/A
15
Operating Expenses
Operating expenses include all the costs incurred to operate the Company, except
for interest expense, the loan loss provision, and income taxes. A continuing
objective of the Company is to manage overhead costs while maintaining optimal
productivity, efficiency, capacity, and quality service. Significant time and
money was spent in 2002 and 2001 to maintain and enhance our state-of-the-art
Internet banking solution for our customers. While enthusiastically embraced by
our target segment of customers, these necessary expenditures will likely not be
recovered for some time in the future as most competitors charge little, if
anything, for Internet banking services. It is important for the Company to
offer this service, however, to maintain a satisfied customer base and market
share with cross-selling opportunities for other more profitable products and
services. Salaries and benefits, the largest component of operating expenses,
were actively monitored and controlled during 2002. Total salaries and benefits
of $4,913,000 in 2002 increased only $13,000 or .3% from 2001. Occupancy
expenses decreased to $674,000 during 2002, a $54,000 or 7.4% decline from 2001.
Office supplies, printing, and postage of $342,000 in 2002 was $34,000 or 9.0%
less than 2001. Computer costs rose in 2002 to total $506,000, a $60,000 or
13.5% increase from 2001. This computer cost increase was primarily attributed
to additional costs associated with the Company's relatively new digital
document imaging as well as business continuity contracts. Advertising and
business promotion decreased $24,000 or 12.4% to total $170,000 in 2002 compared
to 2001. This decline was the result of a more focused and shared approach to
advertising by our subsidiary banks during 2002. Finally, other operating
expenses increased $300,000 or 26.6% to $1,426,000 for 2002 compared to 2001.
This increase was largely due to the impact of costs incurred for consulting,
employee recruiting, Federal Reserve Bank processing, losses incurred on other
real estate, and insurance and bonds. Overall, operating expenses increased
$234,000 or 2.8% to total $8,711,000 versus $8,477,000 in 2001. The efficiency
ratio, defined as noninterest expense, excluding the provision for loan losses,
as a percent of net interest income plus noninterest income, was 61.1% in 2002.
This was an improvement from the efficiency ratio of 62.0% for the year ended
December 31, 2001.
Net Income
The Company's consolidated net income for the three years is as follows (dollar
amounts in thousands):
Year Ended December 31,
--------------------------------------
2002 2001 2000
--------------------------------------
Net income ..................... $3,570 $3,400 $3,560
======================================
Net income increased $170,000 or 5.0% in 2002. The net interest income increased
a strong $725,000 or 6.7%. The provisions for loan losses increased $74,000 to
total $440,000 in 2002. Other income, without securities gains, grew $111,000 or
4.5%. Securities gains decreased to $84,000 in 2002 from $331,000 a year
earlier. Operating expenses rose $234,000 or 2.8% and income taxes increased
$111,000 or 7.7%. Income tax expense increase was attributed to higher net
income in 2002 than 2001 and a slight increase in the effective tax for the year
ended December 31, 2002 of 30.2% compared to 29.7% the prior year.
Net income decreased $160,000 or 4.5% in 2001. The net interest income decreased
$619,000 or 5.4%. The provisions for loan losses decreased $63,000 to total
$366,000 in 2001. Other income, without securities gains, grew $245,000 or a
strong 11.0%. Securities gains increased to $331,000 in 2001 from $13,000 a year
earlier. Operating expenses rose $333,000 or 4.1% and income taxes decreased
$166,000 or 10.4%.
SELECTED CONSOLIDATED RATIOS:
Year Ended December 31,
--------------------------
2002 2001 2000
--------------------------
Percentage of net income to:
Average stockholders' equity ................... 14.87% 14.96% 17.76%
Average total assets ........................... 0.93 0.90 0.97
Percentage of average stockholders' equity to
average total assets ........................... 6.28 6.01 5.44
Dividend payout ratio, based on dividends
declared during the year ....................... 37.10 38.70 36.32
16
INTEREST RATE SENSITIVITY AND RISK MANAGEMENT:
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitivity" refers to those assets
and liabilities which are "sensitive" to fluctuations in rates and yields. When
interest rates move, earnings may be affected in many ways. Interest rates on
assets and liabilities may change at different times or by different amounts.
Maintaining a proper balance between rate sensitive earning assets and rate
sensitive liabilities is the principal function of asset and liability
management of a banking organization.
The following table shows the interest rate sensitivity position at several
repricing intervals (dollar amounts in thousands):
Repricing Maturities at December 31, 2002
----------------------------------------------------------------
Less Than 3-12 1-5 More Than Noninterest
3 Months Months Years 5 Years Bearing Total
----------------------------------------------------------------
Assets:
Loans .............................. $ 44,436 $ 29,379 $ 146,026 $ 55,655 $ 1,730 $ 277,226
Investment securities .............. 1,334 7,092 18,653 11,016 -- 38,095
Other earning assets ............... 30,600 5,644 100 -- -- 36,344
Restricted investment securities ... -- 3,957 -- -- -- 3,957
Nonearning assets .................. -- -- -- -- 23,083 23,083
----------------------------------------------------------------
Total assets ................. $ 76,370 $ 46,072 $ 164,779 $ 66,671 $ 24,813 $ 378,705
================================================================
Liabilities and Equity:
Deposits ........................... $ 47,285 $ 96,582 $ 81,262 $ -- $ 45,293 $ 270,422
Notes payable ...................... -- 3,300 -- -- -- 3,300
Securities sold under agreements
to repurchase and open note ....... 5,292 1,048 1,036 -- -- 7,376
FHLB advances ...................... 4,901 20,107 30,350 9,251 -- 64,609
Company obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
subordinated debentures .......... -- -- -- 4,000 -- 4,000
Other liabilities .................. -- -- -- -- 1,968 1,968
Redeemable common stock held
by KSOP .......................... -- -- -- -- 2,717 2,717
Equity ............................. -- -- -- -- 24,313 24,313
----------------------------------------------------------------
Total liabilities
and equity .................. $ 57,478 $ 121,037 $ 112,648 $ 13,251 $ 74,291 $ 378,705
================================================================
Repricing gap ........................ $ 18,892 $ (74,965) $ 52,131 $ 53,420 $(49,478) $ --
Cumulative repricing gap ............. 18,892 (56,073) (3,942) 49,478 -- --
The data in this table incorporates the contractual repricing characteristics as
well as an estimate of the actual repricing characteristics of the Company's
assets and liabilities. Based on the estimate, 20% of the savings and NOW
accounts are reflected in the less than 3 months category, 30% in the 3-12
months category, with the remainder in the 1-5 years category. Also, 25% of the
money market accounts are reflected in the less than 3 months repricing category
with the remainder in the 3-12 months category.
17
FHLB advances in the 1-5 year repricing category include $17,443,000 of advances
with actual maturities in the greater than 5 year category. These advances have
options associated with them which allow the Company to "put" the advances back
to the FHLB at a date substantially earlier than the stated maturity. The
Company may utilize this put option if deemed appropriate, or hold such advances
until maturity. As part of the Company's overall interest rate risk management,
these puts are analyzed and used when advantageous. During 2002, no advances
were put back to the FHLB.
A positive repricing gap for a given period exists when total interest-earning
assets exceed total interest-bearing liabilities and a negative repricing gap
exists when total interest-bearing liabilities are in excess of interest-earning
assets. Generally a positive repricing gap will result in increased net interest
income in a rising rate environment and decreased net interest income in a
falling rate environment. A negative repricing gap tends to produce increased
net interest income in a falling rate environment and decreased net interest
income in a rising rate environment. At December 31, 2002, using the estimates
discussed above, rate sensitive liabilities exceeded rate sensitive assets
within a one-year period by $56,073,000 and, thus, the Company is positioned to
benefit from a fall in interest rates within the next year.
The Company's repricing gap position is useful for measuring general relative
risk levels. However, even with perfectly matched repricing of assets and
liabilities, interest rate risk cannot be avoided entirely. Interest rate risk
remains in the form of prepayment risk of assets and liabilities, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates, and basis risk. Basis risk refers to the possibility that
the repricing behavior of variable-rate assets could differ from the repricing
characteristics of liabilities which reprice in the same time period. Even
though these assets are match-funded, the spread between asset yields and
funding costs could change.
Because the repricing gap position does not capture these risks, management
utilizes simulation modeling to measure and manage the rate sensitivity exposure
of earnings. The Company's simulation model provides a projection of the effect
on net interest income of various interest rate scenarios and balance sheet
strategies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. Management's asset/liability
committee meets periodically to review the Company's interest rate risk position
and profitability, and to make or recommend adjustments for consideration by the
Board of Directors. Management also reviews the Banks' securities portfolio,
formulates investment strategies, and oversees the timing and implementation of
transactions to assure attainment of the Board's objectives in the most
effective manner. Notwithstanding the Company's interest rate risk management
activities, the potential for changing interest rates is an uncertainty that can
have an adverse effect on net income.
In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's interest rate risk while maintaining or
enhancing net interest margins. At times, depending on the level of general
interest rates, the relationship between long- and short-term interest rates,
market conditions and competitive factors, the Board and management may
determine to increase the Company's interest rate risk position somewhat in
order to increase its net interest margin. The Company's results of operations
and net portfolio values remain vulnerable to increases in interest rates and to
fluctuations in the difference between long- and short-term interest rates.
18
One approach used to quantify interest rate risk is the net portfolio value
("NPV") analysis. In essence, this analysis calculates the difference between
the present value of liabilities and the present value of expected cash flows
from assets and off-balance-sheet contracts. The following table sets forth, at
December 31, 2002, an analysis of the Bank's interest rate risk as measured by
the estimated changes in NPV resulting from instantaneous and sustained parallel
shifts in the yield curve (+ or - 200 basis points, measured in 100 basis point
increments).
Estimated Increase
Change in (Decrease) in NPV
Interest Estimated --------------------------
Rates NPV Amount Amount Percent
- -------------------------------------------------------------------------
(Basis Points) (Dollars in Thousands)
+200 $ 21,864 $ (3,714) (15%)
+100 23,614 (1,964) (8)
- 25,578 - -
- -100 27,786 2,208 9
- -200 30,335 4,757 19
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities, except commodity price risk to the extent such risk may
affect the agricultural loan portfolio.
LIQUIDITY:
For banks, liquidity represents ability to meet both loan commitments and
deposit withdrawals. Factors which influence the need for liquidity are varied,
but include general economic conditions, asset/liability mix, bank reputation,
future FDIC funding needs, changes in regulatory environment, and credit
standing. Assets which provide liquidity consist principally of loans, cash and
due from banks, interest-bearing deposits at financial institutions, investment
securities, and short-term investments such as federal funds. Maturities of
securities and loan payments provide a constant flow of funds available for cash
needs. Liquidity also can be gained by the sale of loans or securities, which
were previously designated as available for sale, FHLB advances, and lines of
credit. Interest rates, relative to the rate paid by the security or loan sold,
along with the maturity of the security or loan, are the major determinants of
the price which can be realized upon sale. Net cash provided by operating
activities totaled $4,477,000 in 2002 which compares to cash provided by
operating activities for the year ended December 31, 2001 of $4,132,000. The
Company continues to generate operating cash from sales of its new production
and refinancing mortgage loans. Net cash provided by investing activities
totaled $3,739,000 for the year ended December 31, 2002 and net cash used in
investing activities totaled $1,676,000 for the year ended December 31, 2001.
Securities available for sale were sold, matured, called, and paid down much
faster than they were replaced. During the years ended December 31, 2002 and
2001 cash used in financing activities totaled $5,594,000 and $3,789,000,
respectively. The cash used during the year resulted primarily from scheduled
payments and prepayments of notes payable and payments which exceeded new
advances from the Federal Home Loan Bank.
The stability of the Company's funding, and thus its ability to manage
liquidity, is greatly enhanced by its consumer deposit base. Consumer deposits
tend to be small in size, diversified across a large base of individuals, and
are government insured to the extent permitted by law. Total deposits under
$100,000 at December 31, 2002 were $243,100,000 or 89.9% of total deposits and
64.2% of total liabilities, mezzanine capital, and equity.
At December 31, 2002, securities sold under agreements to repurchase and
treasury tax and loan open note funding sources totaled $7,376,000. Federal Home
Loan Bank advances totaled $64,609,000. At year-end total federal funds sold and
securities maturing within one year were $39,026,000 or 10.3% of total assets.
Both short-term and long-term liquidity are actively monitored and managed. The
Company had an unused secured line of credit totaling $2,000,000 at December 31,
2002.
Equity increased $1,273,000 during 2002 to total $24,313,000 at December 31,
2002.
19
At December 31, 2002, securities available for sale totaling $38,095,000
included $1,756,000 of gross unrealized gains and no gross unrealized losses.
These securities may be sold in whole or part to increase liquid assets,
reposition the investment portfolio, or for other purposes as defined by
management.
CAPITAL:
As previously noted, stockholders' equity increased $1,273,000 or 5.5% in 2002.
The Company had net income of $3,570,000, an increase in accumulated other
comprehensive income of $243,000, cash dividends declared totaling $1,319,000,
increase in obligation related to KSOP shares totaling $475,000, and net
treasury shares purchased of $746,000. Dividends to stockholders were declared
at a rate of $.92, $.89, and $.85 per share during the years ended December 31,
2002, 2001, and 2000, respectively.
IMPACT OF INFLATION AND CHANGING PRICES:
The financial statements and related data presented herein have been prepared in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services. In the current interest rate environment, liquidity and the maturity
structure of the Company's assets and liabilities are critical to the
maintenance of acceptable performance levels.
EFFECT OF FASB STATEMENTS:
Current accounting developments: The Financial Accounting Standards Board has
issued Statement No. 143, Accounting for Asset Retirement Obligations. This
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. For the
Company, the Statement is effective January 1, 2003. Implementation of the
Statement is not expected to have a material impact on the Company's financial
statements.
The Financial Accounting Standards Board has issued Statement No. 145,
Rescission of FASB Statement Nos. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. This Statement rescinds FASB Statement Nos. 4 and
64, relative to debt extinguishments and provides that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in Opinion 30. Applying the provisions of Opinion 30 will
distinguish transactions that are part of an entity's recurring operations from
those that are unusual or infrequent or that meet the criteria for
classification as an extraordinary item. The Statement amends FASB Statement No.
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. Finally, the Statement rescinds FASB Statement No.
44, Accounting for Intangible Assets of Motor Carriers, and amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of the Statement relative to accounting for leases were effective for
transactions occurring after May 15, 2002. Implementation of these provisions of
the Statement had no impact on the Company's consolidated financial statements.
For the Company, the provisions of the Statement relative to accounting for debt
extinguishment are effective January 1, 2003. Implementation of these provisions
of the Statement is not expected to have a material impact on the Company's
consolidated financial statements.
20
The Financial Accounting Standards Board has issued Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability and Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The Statement provides that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. For the Company, the provisions of
the Statement are effective for exit or disposal activities that are initiated
after December 31, 2002. Implementation of the Statement is not expected to have
a material impact on the Company's consolidated financial statements.
The Financial Accounting Standards Board has issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an interpretation of FASB
Statement Nos. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. Implementation
of these provisions of the Interpretation is not expected to have a material
impact on the Company's consolidated financial statements. The disclosure
requirements of the Interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002, and have been adopted
in the consolidated financial statements for December 31, 2002.
FORWARD LOOKING STATEMENTS:
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This document (including information incorporated by reference) contains,
and future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "bode," "predict,"
"suggest," "appear," "plan," "intend," "estimate," "may," "will," "would,"
"could," "should" or other similar expressions. Additionally, all statements in
this document, including forward-looking statements, speak only as of the date
they are made, and the Company undertakes no obligation to update any statement
in light of new information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of the terrorist attacks that occurred on September 11,
as well as any future threats and attacks, and the response of the United
States to any such threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
21
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third-party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects, and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
In the fourth quarter of 2002, net income was $861,000, compared with $821,000
in the same period of 2001, an increase of 4.9%. The net interest income during
the fourth quarter of 2002 was $2,919,000 compared with $2,731,000 for the
fourth quarter of 2001. The provision for loan losses in the fourth quarter of
2002 was $110,000 compared with $58,000 in 2001. Other income totaled $705,000
and $756,000 during the fourth quarter of 2002 and 2001, respectively. Other
operating expenses of $2,321,000 in the last quarter of 2002 compared with
$2,320,000 for the last quarter of 2001. Income tax expense was $332,000 and
$288,000 for the final quarter of 2002 and 2001, respectively.
22
Quarterly results of operations are as follows (dollar amounts in thousands):
Quarter Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
------------------------------------------------
Total interest income ........................... $5,627 $5,654 $5,607 $5,489
Total interest expense .......................... 2,833 2,716 2,657 2,570
-------------------------------------------
Net interest income .............................. 2,794 2,938 2,950 2,919
Provision for loan losses ........................ 68 167 95 110
Other income ..................................... 679 641 639 705
Other expense .................................... 2,176 2,154 2,060 2,321
-------------------------------------------
Income before income taxes ....................... 1,229 1,258 1,434 1,193
Applicable income taxes .......................... 374 389 449 332
-------------------------------------------
Net income ....................................... $ 855 $ 869 $ 985 $ 861
===========================================
Net income per share, basic and diluted .......... $ 0.59 $ 0.60 $ 0.69 $ 0.60
===========================================
Quarter Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
------------------------------------------------
Total interest income ........................... $6,772 $6,694 $6,395 $5,981
Total interest expense .......................... 4,051 3,991 3,674 3,250
-------------------------------------------
Net interest income .............................. 2,721 2,703 2,721 2,731
Provision for loan losses ........................ 39 139 130 58
Other income ..................................... 601 676 767 756
Other expense .................................... 2,040 2,048 2,069 2,320
-------------------------------------------
Income before income taxes ....................... 1,243 1,192 1,289 1,109
Applicable income taxes .......................... 391 365 389 288
-------------------------------------------
Net income ....................................... $ 852 $ 827 $ 900 $ 821
===========================================
Net income per share, basic and diluted .......... $ 0.57 $ 0.56 $ 0.61 $ 0.56
===========================================
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IOWA FIRST BANCSHARES CORP.
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 25
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets 26
Consolidated statements of income 27
Consolidated statements of changes in stockholders' equity 28
Consolidated statements of cash flows 29 - 30
Notes to consolidated financial statements 31 - 46
- --------------------------------------------------------------------------------
24
McGladrey & Pullen
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Iowa First Bancshares Corp.
Muscatine, Iowa
We have audited the accompanying consolidated balance sheets of Iowa First
Bancshares Corp. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years ended December 31, 2002, 2001, and 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Iowa First
Bancshares Corp. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for the years ended December
31, 2002, 2001, and 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
January 17, 2003
McGladrey & Pullen, LLP is an independent member firm of
RSM International, an affiliation of independent accounting
and consulting firms.
25
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
ASSETS 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Cash and due from banks (Note 1) ................................................. $ 17,283,000 $ 14,661,000
Interest-bearing deposits at financial institutions .............................. 1,791,000 1,620,000
Federal funds sold ............................................................... 30,600,000 31,000,000
Investment securities available for sale (Note 3) ................................ 38,095,000 44,466,000
Loans, net of allowance for loan losses 2002 $3,304,000;
2001 $3,182,000 (Notes 4, 8, and 15) ............................................ 273,922,000 272,695,000
Bank premises and equipment, net (Note 5) ........................................ 5,303,000 5,055,000
Accrued interest receivable ...................................................... 2,672,000 2,793,000
Life insurance contracts ......................................................... 3,953,000 3,361,000
Restricted investment securities ................................................. 3,957,000 3,868,000
Other assets ..................................................................... 1,129,000 1,078,000
------------------------------
Total assets ............................................................. $ 378,705,000 $ 380,597,000
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing .......................................................... $ 45,293,000 $ 42,165,000
Interest-bearing ............................................................. 225,129,000 225,359,000
------------------------------
Total deposits (Note 6) .................................................. 270,422,000 267,524,000
Notes payable (Note 7) ......................................................... 3,300,000 5,419,000
Securities sold under agreements to repurchase (Note 8) ........................ 6,591,000 5,068,000
Federal Home Loan Bank advances (Note 8) ....................................... 64,609,000 70,706,000
Treasury tax and loan open note (Note 8) ....................................... 785,000 622,000
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures (Note 9) ............. 4,000,000 4,000,000
Dividends payable .............................................................. 335,000 331,000
Other liabilities .............................................................. 1,633,000 1,645,000
------------------------------
Total liabilities ........................................................ 351,675,000 355,315,000
------------------------------
Commitments and Contingencies (Note 14)
Redeemable Common Stock Held by Employee Stock Ownership
Plan with 401(k) provisions (KSOP) (Note 11) ................................... 2,717,000 2,242,000
------------------------------
Stockholders' Equity (Note 10):
Preferred stock, stated value of $1.00 per share; shares
authorized 500,000; shares issued none ....................................... -- --
Common stock, no par value; shares authorized 6,000,000; shares issued 2002 and
2001, 1,832,429; shares outstanding 2002,
1,424,445; 2001, 1,456,404 ................................................... 200,000 200,000
Additional paid-in capital ..................................................... 4,254,000 4,265,000
Retained earnings .............................................................. 34,195,000 31,944,000
Accumulated other comprehensive income, net .................................... 1,101,000 858,000
Less cost of common shares acquired for the treasury
2002, 407,984; 2001, 376,025 ................................................. (12,720,000) (11,985,000)
Less maximum cash obligation related to KSOP shares (Note 11) .................. (2,717,000) (2,242,000)
------------------------------
Total stockholders' equity ............................................... 24,313,000 23,040,000
------------------------------
Total liabilities and stockholders' equity ............................... $ 378,705,000 $ 380,597,000
==============================
See Notes to Consolidated Financial Statements.
26
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans, including fees:
Taxable ............................................... $19,533,000 $21,909,000 $22,815,000
Nontaxable ............................................ 131,000 107,000 148,000
Investment securities available for sale:
Taxable ............................................... 1,171,000 2,034,000 2,748,000
Nontaxable ............................................ 821,000 932,000 959,000
Federal funds sold ...................................... 533,000 645,000 385,000
Restricted investment securities ........................ 117,000 171,000 251,000
Other ................................................... 71,000 44,000 --
---------------------------------------
Total interest income ............................. 22,377,000 25,842,000 27,306,000
---------------------------------------
Interest expense:
Deposits ................................................ 5,927,000 9,837,000 10,626,000
Notes payable ........................................... 307,000 424,000 482,000
Other borrowed funds .................................... 4,129,000 4,392,000 4,703,000
Company obligated mandatorily redeemable
preferred securities .................................. 413,000 313,000 --
---------------------------------------
Total interest expense ............................ 10,776,000 14,966,000 15,811,000
---------------------------------------
Net interest income ............................... 11,601,000 10,876,000 11,495,000
Provision for loan losses (Note 4) ........................ 440,000 366,000 429,000
---------------------------------------
Net interest income after provision for loan losses 11,161,000 10,510,000 11,066,000
---------------------------------------
Other income:
Trust department ........................................ 367,000 368,000 382,000
Service fees ............................................ 1,514,000 1,356,000 1,303,000
Investment securities gains, net ........................ 84,000 331,000 13,000
Gains on loans sold ..................................... 212,000 64,000 11,000
Other ................................................... 487,000 681,000 528,000
---------------------------------------
Total other income ................................ 2,664,000 2,800,000 2,237,000
---------------------------------------
Operating expenses:
Salaries and employee benefits .......................... 4,913,000 4,900,000 4,755,000
Occupancy expenses, net ................................. 674,000 728,000 716,000
Equipment expenses ...................................... 680,000 707,000 616,000
Office supplies, printing, and postage .................. 342,000 376,000 367,000
Computer costs .......................................... 506,000 446,000 404,000
Advertising and business promotion ...................... 170,000 194,000 180,000
Other operating expenses ................................ 1,426,000 1,126,000 1,106,000
---------------------------------------
Total operating expenses .......................... 8,711,000 8,477,000 8,144,000
---------------------------------------
Income before income taxes ........................ 5,114,000 4,833,000 5,159,000
Income taxes (Note 12) .................................... 1,544,000 1,433,000 1,599,000
---------------------------------------
Net income ........................................ $ 3,570,000 $ 3,400,000 $ 3,560,000
=======================================
Weighted average common shares, basic and diluted ......... 1,440,466 1,478,220 1,524,473
Net income per common share, basic and diluted (Note 13) .. $ 2.48 $ 2.30 $ 2.34
=======================================
Dividends declared per share .............................. $ 0.92 $ 0.89 $ 0.85
=======================================
See Notes to Consolidated Financial Statements.
27
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001, and 2000
Accumu-
lated
Other Maximum
Compre- Cash
Additional hensive Obligation Compre-
Common Paid-In Retained Income Treasury Related to hensive
Stock Capital Earnings (Loss) Stock KSOP Shares Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 ... $200,000 $4,349,000 $27,585,000 $ (649,000) $(10,292,000) $(2,507,000) $18,686,000
Comprehensive income:
Net income ............... -- -- 3,560,000 -- -- -- $3,560,000 3,560,000
Other comprehensive income,
net of tax (Note 2) .... -- -- -- 939,000 -- -- 939,000 939,000
----------
Comprehensive
income ............. $4,499,000
==========
Cash dividends declared, $.85
per share .................. -- -- (1,293,000) -- -- -- (1,293,000)
Purchase of 31,813 shares
of common stock for the
treasury ................. -- -- -- -- (724,000) -- (724,000)
Sale of 3,409 shares of
common stock to the KSOP . -- (40,000) -- -- 115,000 -- 75,000
Change related to KSOP
shares (Note 11) ......... -- -- -- -- -- 389,000 389,000
--------------------------------------------------------------------------- ------------
Balance, December 31,2000 .... 200,000 4,309,000 29,852,000 290,000 (10,901,000) (2,118,000) 21,632,000
Comprehensive income:
Net income ............... -- -- 3,400,000 -- -- -- $3,400,000 3,400,000
Other comprehensive income,
net of tax (Note 2) .... -- -- -- 568,000 -- -- 568,000 568,000
----------
Comprehensive income . $3,968,000
==========
Cash dividends declared, $.89
per share .................. -- -- (1,308,000) -- -- -- (1,308,000)
Purchase of 56,387 shares
of common stock for the
treasury ................. -- -- -- -- (1,227,000) -- (1,227,000)
Sale of 4,494 shares of
common stock to the KSOP . -- (44,000) -- -- 143,000 -- 99,000
Change related to KSOP
shares (Note 11) ........ -- -- -- -- -- (124,000) (124,000)
--------------------------------------------------------------------------- ------------
Balance, December 31,2001 .... 200,000 4,265,000 31,944,000 858,000 (11,985,000) (2,242,000) 23,040,000
Comprehensive income:
Net income ............... -- -- 3,570,000 -- -- -- $3,570,000 3,570,000
Other comprehensive income,
net of tax (Note 2) ..... -- -- -- 243,000 -- -- 243,000 243,000
----------
Comprehensive income .. $3,813,000
==========
Cash dividends declared, $.92
per share ................... -- -- (1,319,000) -- -- -- (1,319,000)
Purchase of 34,045 shares
of common stock for the
treasury .................... -- -- -- -- (800,000) -- (800,000)
Sale of 2,086 shares of
common stock to the KSOP
and others ................. -- (11,000) -- -- 65,000 -- 54,000
Change related to KSOP
shares (Note 11) ........... -- -- -- -- -- (475,000) (475,000)
--------------------------------------------------------------------------- ------------
Balance, December 31, 2002 ... $200,000 $4,254,000 $34,195,000 $1,101,000 $(12,720,000) ($2,717,000) $24,313,000
========================================================================== ============
See Notes to Consolidated Financial Statements.
28
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
- -----------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ................................... $ 3,570,000 $ 3,400,000 $ 3,560,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from loans sold ................... 20,415,000 8,209,000 2,095,000
Loans underwritten ......................... (20,593,000) (8,145,000) (2,084,000)
Gains on loans sold ........................ (212,000) (64,000) (11,000)
Provision for loan losses .................. 440,000 366,000 429,000
Investment securities gains, net ........... (84,000) (331,000) (13,000)
Depreciation ............................... 537,000 647,000 636,000
Deferred income taxes ...................... (37,000) (45,000) (177,000)
Amortization of premiums and accretion
of discounts on investment securities,
net ...................................... 44,000 (31,000) 12,000
Changes in assets and liabilities:
(Increase) decrease in accrued interest
receivable ............................. 121,000 588,000 (396,000)
Net (increase) decrease in other assets .. 397,000 (133,000) 605,000
Net increase (decrease) in other
liabilities ............................ (121,000) (329,000) 292,000
--------------------------------------------
Net cash provided by operating
activities ............................. 4,477,000 4,132,000 4,948,000
--------------------------------------------
Cash Flows from Investing Activities:
Net increase in interest-bearing deposits
at financial institutions .................. (171,000) (1,432,000) (33,000)
Net (increase) decrease in federal funds sold 400,000 (16,350,000) 1,150,000
Proceeds from sales, maturities, calls, and
paydowns of securities available for sale .. 16,320,000 26,482,000 11,254,000
Purchase of securities available for sale .... (9,520,000) (6,623,000) (13,331,000)
Net increase in loans ........................ (1,824,000) (2,773,000) (4,073,000)
Purchases of bank premises and equipment ..... (785,000) (766,000) (116,000)
Purchases of life insurance contracts ........ (405,000) -- (3,110,000)
Increase in cash value of life insurance
contracts .................................. (187,000) (177,000) (74,000)
Purchases of restricted investment securities (89,000) (37,000) (364,000)
--------------------------------------------
Net cash provided by (used in) investing
activities ............................. $ 3,739,000 $ (1,676,000) $ (8,697,000)
--------------------------------------------
(Continued)
29
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase (decrease) in noninterest-bearing
deposits ......................................... $ 3,128,000 $ (6,484,000) $ 1,474,000
Net increase (decrease) in interest-bearing deposits (230,000) 2,528,000 434,000
Repayment of notes payable ......................... (2,119,000) (732,000) (718,000)
Net increase (decrease) in line of credit .......... -- (125,000) 125,000
Net increase (decrease) in securities sold
under agreements to repurchase ................... 1,523,000 1,118,000 (676,000)
Advances from Federal Home Loan Bank ............... 7,100,000 18,850,000 16,100,000
Payments of advances from Federal Home
Loan Bank .......................................... (13,197,000) (19,675,000) (9,190,000)
Net increase (decrease) in treasury tax and
loan open note ................................... 163,000 (565,000) (1,024,000)
Net proceeds from issuance of Company
obligated mandatorily redeemable preferred
securities of subsidiary trust ................... -- 3,832,000 --
Cash dividends paid ................................ (1,315,000) (1,309,000) (1,282,000)
Purchases of common stock for the treasury ......... (800,000) (1,227,000) (724,000)
Proceeds from issuance of common stock ............. 153,000 -- 75,000
--------------------------------------------
Net cash provided by (used in)
financing activities ......................... (5,594,000) (3,789,000) 4,594,000
--------------------------------------------
Net increase (decrease) in cash and
due from banks ............................... 2,622,000 (1,333,000) 845,000
Cash and due from banks:
Beginning .......................................... 14,661,000 15,994,000 15,149,000
--------------------------------------------
Ending ............................................. $ 17,283,000 $ 14,661,000 $ 15,994,000
============================================
Supplemental Disclosures of Cash Flow
Information, cash payments for:
Interest ........................................... $ 10,963,000 $ 15,452,000 $ 15,547,000
Income taxes ....................................... 1,619,000 1,542,000 1,903,000
Supplemental Schedule of Noncash Investing
and Financing Activities:
Change in accumulated other comprehensive
income, unrealized gains on securities
available for sale, net .......................... 243,000 568,000 939,000
(Increase) decrease in maximum cash obligation
related to KSOP shares ........................... (475,000) (124,000) 389,000
Due from KSOP for sale of common stock ............. -- 99,000 --
Transfers of loans to other real estate owned ...... 547,000 251,000 97,000
See Notes to Consolidated Financial Statements.
30
IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Iowa First Bancshares Corp. (the "Company") is a bank holding company
headquartered in Muscatine, Iowa. The Company owns the outstanding stock of two
national banks, First National Bank of Muscatine and First National Bank in
Fairfield. First National Bank of Muscatine has a total of five locations in
Muscatine, Iowa. First National Bank in Fairfield has two locations in
Fairfield, Iowa. Each bank is engaged in the general commercial banking business
and provides full service banking to individuals and businesses, including
checking, savings, money market, and time deposit accounts, commercial loans,
consumer loans, real estate loans, safe deposit facilities, transmitting of
funds, trust services, and such other banking services as are usual and
customary for commercial banks. The Company also owns the outstanding stock of
Iowa First Capital Trust I, which was capitalized in March 2001 for the purpose
of issuing Company obligated mandatorily redeemable preferred securities.
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The allowance for loan losses is inherently subjective, as it requires material
estimates that are susceptible to significant change. The fair value disclosure
of financial instruments is an estimate that can be computed within a range.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Presentation of cash flows: For purposes of reporting cash flows, cash and due
from banks includes cash on-hand, amounts due from banks, and the cash items in
process of clearing. Cash flows from interest-bearing deposits at financial
institutions, federal funds sold, loans, deposits, securities sold under
agreements to repurchase, revolving line of credit, and the treasury tax and
loan open note are reported net.
Cash and due from banks: The Banks are required by federal banking regulations
to maintain certain cash and due from bank reserves. The reserve requirement was
approximately $3,232,000 and $1,668,000 at December 31, 2002 and 2001,
respectively.
Investment securities available for sale: Securities available for sale are
accounted for at fair value and the unrealized holding gains or losses are
presented as a separate component of accumulated other comprehensive income, net
of their deferred income tax effect. Realized gains and losses, determined using
the specific-identification method, are included in earnings.
Declines in the fair value of individual available-for-sale securities below
their cost that are other than temporary would result in write-downs of the
individual securities to their fair value. The related write-downs would be
included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the expected life of the security. There were no investments held to
maturity or for trading purposes as of December 31, 2002 or 2001.
Loans: Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for loan losses. The Banks record impaired loans at
the present value of expected future cash flows discounted at the loan's
effective interest rate, or as an expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent. A
loan is impaired when it is probable the creditor will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement. The Banks recognize interest income on impaired loans on a
cash basis.
31
The allowance for loan losses is maintained at the level considered adequate by
management of the Banks to provide for losses that are probable. The allowance
is increased by provisions charged to operating expense and reduced by net
charge-offs. In determining the adequacy of the allowance balance the Banks make
continuous evaluations of the loan portfolio and related off-balance sheet
commitments, consider current economic conditions, historical loan loss
experience, review of specific problem loans, and other factors.
Direct loan origination fees and costs are generally being deferred and the net
amounts amortized as an adjustment of the related loan or lease's yield. The
Banks generally amortize these amounts over the contractual life. Direct loan
origination fees and costs related to loans sold to unrelated third parties are
recognized as income or expense in the current consolidated statements of
income. Commitment fees based upon a percentage of customers' unused lines of
credit and fees related to standby letters of credit are not significant.
Sales of loans: As part of its management of assets and liabilities, the Company
periodically sells residential real estate loans. Loans which are expected to be
sold in the forseeable future are classified as held for sale and are recorded
at the lower of cost or estimated market value in the aggregate.
Credit related financial instruments: In the ordinary course of business, the
Company has entered into commitments to extend credit, including standby letters
of credit. Such financial instruments are recorded when they are funded.
Transfers of financial assets: Transfers of financial assets are accounted for
as sales, only when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right to pledge or
exchange the assets it received, and no condition both constrains the transferee
from taking advantage of its right to pledge or exchange and provides more than
a modest benefit to the transferor, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity or the ability to unilaterally cause the holder to
return specific assets.
Bank premises and equipment: Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method based on the estimated useful lives.
Life insurance contracts: Life insurance contracts are stated at their cash
surrender value.
Restricted investment securities: Restricted investment securities represent
Federal Home Loan Bank and Federal Reserve Bank common stock. The stock is
carried at cost.
Other assets: Other real estate (ORE), which is included in other assets,
represents properties acquired through foreclosure, in-substance foreclosure, or
other proceedings. ORE is recorded at the lower of the amount of the loan or
fair value of the properties. Any write-down to fair value at the time of
transfer to ORE is charged to the allowance for loan losses. Property is
evaluated regularly to ensure that the recorded amount is supported by the
current fair value. Subsequent write-downs to fair value are charged to
earnings.
Other revenue recognition: Revenue from trust services and other service charges
and fees is recognized as the services are provided.
Income taxes: The Company files its tax return on a consolidated basis with its
subsidiary banks. The entities follow the direct reimbursement method of
accounting for income taxes under which income taxes or credits which result
from the subsidiary banks' inclusion in the consolidated tax return are paid to
or received from the parent company.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Common stock held by KSOP: The Company's maximum cash obligation related to
these shares is classified outside stockholders' equity because the shares are
not readily traded and could be put to the Company for cash.
32
Trust assets: Trust assets (other than cash deposits) held by the Banks in
fiduciary or agency capacities for its customers are not included in the
accompanying consolidated balance sheets since such items are not assets of the
Banks.
Earnings per share: Basic earnings per share are arrived at by dividing net
income by the weighted average number of shares of common stock outstanding for
the respective period. Diluted earnings per share are arrived at by dividing net
income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period.
Current accounting developments: The Financial Accounting Standards Board has
issued Statement No. 143, Accounting for Asset Retirement Obligations. This
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. For the
Company, the Statement is effective January 1, 2003. Implementation of the
Statement is not expected to have a material impact on the Company's
consolidated financial statements.
The Financial Accounting Standards Board has issued Statement No. 145,
Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. This Statement rescinds FASB Statement Nos. 4
and 64, relative to debt extinguishments and provides that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in Opinion 30. Applying the provisions of Opinion 30 will
distinguish transactions that are part of an entity's recurring operations from
those that are unusual or infrequent or that meet the criteria for
classification as an extraordinary item. The Statement amends FASB Statement No.
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. Finally, the Statement rescinds FASB Statement No.
44, Accounting for Intangible Assets of Motor Carriers, and amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of the Statement relative to accounting for leases were effective for
transactions occurring after May 15, 2002. Implementation of these provisions of
the Statement had no impact on the Company's consolidated financial statements.
For the Company, the provisions of the Statement relative to accounting for debt
extinguishment are effective January 1, 2003. Implementation of these provisions
of the Statement is not expected to have a material impact on the Company's
consolidated financial statements.
The Financial Accounting Standards Board has issued Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability and Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The Statement provides that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. For the Company, the provisions of
the Statement are effective for exit or disposal activities that are initiated
after December 31, 2002. Implementation of the Statement is not expected to have
a material impact on the Company's consolidated financial statements.
The Financial Accounting Standards Board has issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. Implementation
of these provisions of the Interpretation is not expected to have a material
impact on the Company's consolidated financial statements. The disclosure
requirements of the Interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002, and have been adopted
in the consolidated financial statements for December 31, 2002.
Reclassifications: Certain amounts in the prior year financial statements have
been reclassified, with no effect on net income or stockholders' equity, to
conform with current year presentations.
33
Note 2. Comprehensive Income
Comprehensive income is defined as the change in equity during a period from
transactions and other events from non-owner sources. Comprehensive income is
the total of net income and other comprehensive income, which for the Company is
comprised entirely of unrealized gains and losses on securities available for
sale.
Other comprehensive income is comprised as follows:
Tax
Before Expense Net
Tax (Benefit) of Tax
----------------------------------
Year Ended December 31, 2002
----------------------------------
Unrealized gains on securities available
for sale:
Unrealized holding gains arising during
the year .............................. $ 473,000 $ 178,000 $ 295,000
Less, reclassification adjustment for
gains included in net income .......... 84,000 32,000 52,000
----------------------------------
Other comprehensive income ........ $ 389,000 $ 146,000 $ 243,000
==================================
Year Ended December 31, 2001
----------------------------------
Unrealized gains on securities available
for sale:
Unrealized holding gains arising during
the year .............................. $1,235,000 $ 459,000 $ 776,000
Less, reclassification adjustment for
gains included in net income .......... 331,000 123,000 208,000
----------------------------------
Other comprehensive income ........ $ 904,000 $ 336,000 $ 568,000
==================================
Year Ended December 31, 2000
----------------------------------
Unrealized gains on securities available
for sale:
Unrealized holding gains arising during
the year .............................. $1,511,000 $ 564,000 $ 947,000
Less, reclassification adjustment for
gains included in net income .......... 13,000 5,000 8,000
----------------------------------
Other comprehensive income ........ $1,498,000 $ 559,000 $ 939,000
==================================
Note 3. Investment Securities Available for Sale
The amortized cost and fair value of investment securities available for sale as
of December 31, 2002 and 2001 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------
December 31, 2002
-----------------------------------------------------
U.S. government agencies ....... $17,591,000 $ 651,000 $ -- $18,242,000
Mortgage-backed securities ..... 268,000 13,000 -- 281,000
State and political subdivisions 15,799,000 970,000 -- 16,769,000
Corporate obligations .......... 2,681,000 122,000 -- 2,803,000
-----------------------------------------------------
$36,339,000 $ 1,756,000 $ -- $38,095,000
=====================================================
December 31, 2001
-----------------------------------------------------
U.S. Treasury securities ....... $ 1,506,000 $ 27,000 $ -- $ 1,533,000
U.S. government agencies ....... 17,481,000 641,000 (3,000) 18,119,000
Mortgage-backed securities ..... 625,000 15,000 -- 640,000
State and political subdivisions 17,952,000 538,000 (12,000) 18,478,000
Corporate obligations .......... 5,535,000 161,000 -- 5,696,000
-----------------------------------------------------
$43,099,000 $ 1,382,000 $ (15,000) $44,466,000
=====================================================
34
The amortized cost and fair value of investment securities available for sale as
of December 31, 2002, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities for mortgage-backed securities
because the mortgages underlying the securities may be prepaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following summary.
Amortized Fair
Cost Value
---------------------------
Securities available for sale:
Due in one year or less ........................ $ 8,285,000 $ 8,426,000
Due after one year through five years .......... 17,595,000 18,601,000
Due after five years through ten years ......... 7,897,000 8,381,000
Due after ten years ............................ 2,294,000 2,406,000
---------------------------
36,071,000 37,814,000
Mortgage-backed securities ..................... 268,000 281,000
---------------------------
$36,339,000 $38,095,000
===========================
Investment securities with a carrying value of $17,633,000 and $16,359,000 as of
December 31, 2002 and 2001, respectively, are pledged on securities sold under
agreements to repurchase, trust deposits, and for other purposes as required or
permitted by law.
All sales of securities during the years ended December 31, 2002, 2001, and 2000
were from securities identified as available for sale. Information on proceeds
received, as well as the gross gains and losses from the sale of those
securities is as follows for the years ended December 31, 2002, 2001, and 2000:
2002 2001 2000
----------------------------------
Proceeds from sales of securities .......... $4,013,000 $11,077,000 $ 23,000
Gross gains from sales of securities ....... 86,000 332,000 13,000
Gross losses from sales of securities ...... 2,000 1,000 --
Note 4. Loans
The composition of loans is summarized as follows:
December 31,
-------------------------------
2002 2001
-------------------------------
Commercial ............................... $109,045,000 $106,286,000
Agricultural ............................. 28,185,000 27,926,000
Real estate:
Construction ........................... 6,051,000 7,752,000
Mortgage ............................... 113,295,000 110,931,000
Tax exempt, mortgage ................... 3,297,000 1,290,000
Installment .............................. 17,118,000 21,401,000
Other .................................... 235,000 291,000
-------------------------------
Total loans ...................... 277,226,000 275,877,000
Less allowance for loan losses ........... 3,304,000 3,182,000
-------------------------------
$273,922,000 $272,695,000
===============================
Included in commercial loans above are general warehousing and storage industry
loans totaling $7,709,000 as of December 31, 2002.
Included in real estate mortgage loans above are loans held for sale of $390,000
and none as of December 31, 2002 and 2001, respectively.
Loans considered to be impaired are as follows:
December 31,
-----------------------
2002 2001
-----------------------
Impaired loans for which an allowance has been
provided ........................................... $2,095,000 $2,866,000
=======================
Allowance provided for impaired loans, included in the
allowance for loan losses .......................... $ 410,000 $ 251,000
=======================
35
There are no loans impaired for which an allowance has not been provided.
The average recorded investment in impaired loans during 2002 and 2001 was
$2,319,000 and $3,462,000, respectively. Interest income on impaired loans of
$269,000, $339,000, and $9,000 was recognized for cash payments received in
2002, 2001, and 2000, respectively.
Nonaccruing loans totaled $1,730,000 and $640,000 at December 31, 2002 and 2001,
respectively. Interest income in the amount of $100,000, $63,000, and $47,000
would have been earned on the nonaccrual loans had they been performing loans in
accordance with their original terms during the years ended December 31, 2002,
2001, and 2000, respectively. The interest collected on loans designated as
nonaccrual loans and included in income for the years ended December 31, 2002,
2001, and 2000 totaled $30,000, $57,000, and $14,000, respectively.
Loans past due 90 days or more and still accruing interest totaled $1,053,000
and $128,000 as of December 31, 2002 and 2001, respectively.
Changes in the allowance for loan losses are summarized as follows:
Year Ended December 31,
-------------------------------------
2002 2001 2000
-------------------------------------
Beginning balance .................... $3,182,000 $3,268,000 $3,091,000
Provisions charged to expense ...... 440,000 366,000 429,000
Recoveries ......................... 53,000 52,000 78,000
-------------------------------------
3,675,000 3,686,000 3,598,000
Loans charged off .................. 371,000 504,000 330,000
-------------------------------------
Ending balance ....................... $3,304,000 $3,182,000 $3,268,000
=====================================
The Company retains mortgage loan servicing on loans sold into the secondary
market which are not included in the accompanying consolidated balance sheets.
The unpaid principal balance on these loans was $28,170,000 and $14,021,000 as
of December 31, 2002 and 2001, respectively. Custodial escrow balances
maintained in connection with these loans were approximately $133,000 and
$88,000 as of December 31, 2002 and 2001, respectively. All loans sold are
without recourse.
Note 5. Bank Premises and Equipment
Bank premises and equipment are summarized as follows:
Years of
Useful
Lives December 31,
------------------------
2002 2001
------------------------
Land ................................ $ 1,136,000 $ 756,000
Bank premises ....................... 10-40 6,452,000 6,265,000
Leasehold improvements .............. 5-15 122,000 201,000
Furniture and equipment ............. 5-15 2,864,000 3,079,000
------------------------
10,574,000 10,301,000
Accumulated depreciation ............ 5,271,000 5,246,000
------------------------
$ 5,303,000 $ 5,055,000
========================
Included in land at December 31, 2002 is $380,000 representing the cost of
property acquired for the purpose of construction of a new branch bank building.
Additionally, as of December 31, 2002, bank premises include $185,000 of
construction in process related to the construction of this new branch bank
building as well as the remodeling of one of the Company's main banking
facilities. Also see Note 14.
36
Note 6. Deposits
The composition of deposits is summarized as follows:
December 31,
----------------------------------
2002 2001
----------------------------------
Demand ............................. $ 96,350,000 $ 95,819,000
NOW accounts ....................... 35,246,000 32,948,000
Savings ............................ 22,584,000 20,478,000
Time certificates .................. 116,242,000 118,279,000
----------------------------------
$270,422,000 $267,524,000
==================================
Included in interest-bearing deposits are certificates of deposit with a minimum
denomination of $100,000 totaling $27,322,000 and $27,947,000 as of December 31,
2002 and 2001, respectively.
At December 31, 2002, the scheduled maturities of all certificates of deposit
are as follows:
Year ending December 31:
2003 $ 61,754,000
2004 30,134,000
2005 7,413,000
2006 5,911,000
2007 6,172,000
Thereafter 4,858,000
-------------
$ 116,242,000
=============
Note 7. Notes Payable
Notes payable are summarized as follows:
December 31,
-----------------------
2002 2001
-----------------------
Term note payable to a bank, interest fixed at 7.41%,
due May 4, 2002, with quarterly principal and interest
payments of $77,000, secured by stock
of subsidiary banks of the Company .................... $ -- $1,569,000
Term note payable to a bank, interest fixed at 7.36%,
due May 4, 2003, with annual principal installments
of $550,000, secured by stock of subsidiary banks
of the Company ........................................ 3,300,000 3,850,000
-----------------------
$3,300,000 $5,419,000
=======================
The Company also has a $2,000,000 line of credit with interest floating and paid
quarterly at prime rate (4.25% as of December 31, 2002), which is due May 4,
2003. There were no borrowings under this agreement as of December 31, 2002 and
2001.
The notes payable include certain restrictive covenants regarding the Company's
net worth and regulatory capital.
Note 8. Other Borrowed Funds
Other borrowed funds consist of the following:
December 31,
--------------------------
2002 2001
--------------------------
Securities sold under agreements to repurchase ... $ 6,591,000 $ 5,068,000
Federal Home Loan Bank advances .................. 64,609,000 70,706,000
Treasury tax and loan open note .................. 785,000 622,000
37
The securities sold under agreements to repurchase represent agreements with
customers of the Banks which are collateralized with securities of the Banks
held by the Federal Home Loan Bank of Des Moines. The Federal Home Loan Bank may
sell, loan, or otherwise dispose of such securities to other parties in the
normal course of their operations with prior written approval of the Banks, and
have agreed to resell to the Banks substantially identical securities at the
maturities of the agreements. At December 31, 2002, all but $1,036,000 of the
securities sold under agreements to repurchase mature within twelve months. Of
this $1,036,000, $502,000 matures within two years and the remaining $534,000
matures within four years. At December 31, 2001, all but $1,318,000 of the
securities sold under agreements to repurchase mature within twelve months. Of
this $1,318,000, $1,011,000 matures within 2 years and the remaining $307,000
matures within three years.
Additional information concerning securities sold under agreements to repurchase
follows:
December 31,
------------------------
2002 2001
------------------------
Daily average amount outstanding during the year .... $ 5,845,000 $ 4,464,000
Maximum outstanding as of any month-end ............. 7,349,000 5,068,000
Weighted average interest rate during the year ...... 2.68% 4.11%
Weighted average interest rate at the end of the year 2.18% 2.78%
Securities underlying the agreements at the end
of the year, carrying and fair value .............. $10,734,000 $10,935,000
Advances from the Federal Home Loan Bank as of December 31, 2002 bear interest
and are due as follows:
Weighted
Average
Interest
Rate at
Year-End Balance Due
-------------------------
Year ending December 31:
2003 ................................ 5.81% $ 9,050,000
2004 ................................ 6.25 7,950,000
2005 ................................ 5.19 6,500,000
2006 ................................ 5.32 10,950,000
2007 ................................ 4.75 4,950,000
Thereafter .......................... 5.79 25,209,000
------------
$ 64,609,000
============
Of the advances maturing after 2007, $17,443,000 have options which allow the
Company the right, but not the obligation, to "put" the advances back to the
Federal Home Loan Bank. The majority of these put options begin to be
exercisable in 2003 and 2004.
As of December 31, 2001 advances from the Federal Home Loan Bank in the amount
of $70,706,000 had interest rates between 3.83% and 7.39% and various maturity
dates between 2000 and 2014.
First mortgage loans of approximately $90,526,000 and $92,380,000 as of December
31, 2002 and 2001, respectively, are pledged as collateral on Federal Home Loan
Bank advances.
The treasury tax and loan open note represents overnight borrowings from the
Federal Reserve Bank system.
Note 9. Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debentures
On March 28, 2001, the Company issued 4,000 shares totaling $4,000,000 of
Company obligated mandatorily redeemable preferred securities of Iowa First
Capital Trust I. The securities provide for cumulative cash distributions
calculated at a 10.18% annual rate. The Company may, at one or more times, defer
interest payments on the capital securities for up to 10 consecutive semi-annual
periods, but not beyond June 8, 2031. At the end of the deferral period, all
accumulated and unpaid distributions will be paid. The capital securities will
be redeemed on June 8, 2031; however, the Company has the option to shorten the
maturity date to a date not earlier than June 8, 2011. The redemption price
begins at 105.09% to par and is reduced 51 basis points each year until June 8,
2021 when the capital securities can be redeemed at par. Holders of the capital
securities have no voting rights, are unsecured, and rank junior in priority of
payment to all of the Company's indebtedness and senior to the Company's capital
stock. For regulatory purposes, the entire amount of the capital securities is
allowed in the calculation of Tier 1 capital. The capital securities are
included in the consolidated balance sheet as a liability with the cash
distributions included in interest expense.
38
Note 10. Regulatory Matters
The Company and Banks ("Entities") are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Entities' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Entities must meet specific capital guidelines that involve quantitative
measures of the Entities' assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Entities' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Entities to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2002, that the
Entities meet all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately or well capitalized an institution must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since the notification that management
believes have changed the Banks' categories.
The Company and Banks' actual capital amounts and ratios are presented in the
following table.
To Be Well
Capitalized under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------
As of December 31, 2002
Total Capital (to Risk Weighted Assets):
Consolidated .......................... $32,808,000 12.4% $ 21,220,000 >8.0% N/A N/A
First National Bank of Muscatine ...... 27,280,000 14.5 15,056,000 >8.0 $ 18,820,000 >10.0%
First National Bank in Fairfield ...... 8,919,000 11.7 6,095,000 >8.0 7,619,000 >10.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated .......................... 29,504,000 11.1 10,610,000 >4.0 N/A N/A
First National Bank of Muscatine ...... 24,925,000 13.2 7,528,000 >4.0 11,292,000 > 6.0
First National Bank in Fairfield ...... 8,167,000 10.7 3,048,000 >4.0 4,572,000 > 6.0
Tier 1 Capital (to Average Assets):
Consolidated .......................... 29,504,000 7.5 15,659,000 >4.0 N/A N/A
First National Bank of Muscatine ...... 24,925,000 8.7 11,426,000 >4.0 14,283,000 > 5.0
First National Bank in Fairfield ...... 8,167,000 7.7 4,223,000 >4.0 5,279,000 > 5.0
As of December 31, 2001
Total Capital (to Risk Weighted Assets):
Consolidated .......................... $31,181,000 11.8% $ 21,188,000 >8.0% N/A N/A
First National Bank of Muscatine ...... 26,231,000 13.6 15,390,000 >8.0 $ 19,237,000 >10.0%
First National Bank in Fairfield ...... 8,690,000 12.4 5,592,000 >8.0 6,989,000 >10.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated .......................... 27,999,000 10.6 10,594,000 >4.0 N/A N/A
First National Bank of Muscatine ...... 23,825,000 12.4 7,695,000 >4.0 11,542,000 > 6.0
First National Bank in Fairfield ...... 8,030,000 11.5 2,796,000 >4.0 4,194,000 > 6.0
Tier 1 Capital (to Average Assets):
Consolidated .......................... 27,999,000 7.4 15,117,000 >4.0 N/A N/A
First National Bank of Muscatine ...... 23,825,000 8.5 11,167,000 >4.0 13,959,000 > 5.0
First National Bank in Fairfield ...... 8,030,000 8.3 3,887,000 >4.0 4,859,000 > 5.0
Current banking law limits the amount of dividends banks can pay. As of December
31, 2002, amounts available for payment of dividends were $4,279,000 and
$464,000 for First National Bank of Muscatine and First National Bank in
Fairfield, respectively. Regardless of formal regulatory restrictions the Banks
may not pay dividends which would result in their capital levels being reduced
below the minimum requirements shown above.
39
Note 11. Employee Benefits
The Company and bank subsidiaries sponsor an Employee Stock Ownership Plan with
401(k) provisions (KSOP). This plan owns 102,545 shares of the Company as of
December 31, 2002 and covers substantially all employees who have reached the
age of 21 and worked at least 1,000 hours any year. The Company and subsidiary
banks match 50% of the amount an employee contributes to the plan up to a
maximum of 6% of the employee's pay. Additionally, the Company and subsidiary
banks may make profit sharing contributions to the plan which are allocated to
the accounts of participants in the plan on the basis of total relative
compensation. The amounts expensed for the years ended December 31, 2002, 2001,
and 2000 were $319,000, $320,000, and $321,000, respectively.
An employee, upon termination of employment, has the option of retaining
ownership of shares vested pursuant to the plan or selling such shares to the
Company. Since the shares of common stock held by the KSOP are not readily
traded, the Company has reflected the maximum cash obligation related to those
securities outside of stockholders' equity. As of December 31, 2002, 102,545
shares held by the KSOP, at a fair value of $26.50 per share, have been
reclassified from stockholders' equity to mezzanine capital.
The Company has entered into deferred compensation agreements with certain
directors and executive officers of the Company and Banks. Under the provisions
of the agreements the directors and officers may defer a portion of their
compensation each year. Based upon individual performance, if Board established
performance targets are met, a match of up to 50% of the officers deferrals
(with an annual cap of $6,250 per participant) may be paid by the Company.
Related to the agreements, the Company has purchased various life insurance
contracts. Interest on deferrals is computed at an annual rate equal to the
taxable equivalent (determined using the Company's highest marginal tax bracket)
of the highest yielding insurance contract purchased by the Company related to
the agreements. At December 31, 2002 the rate is 10%. Upon retirement, the
director or officer will receive the deferral balance in 180 equal monthly
installments. During the years ended December 31, 2002, 2001, and 2000, the
Company expensed $134,000, $124,000, and $119,000, respectively, related to the
agreements. As of December 31, 2002 and 2001 the liability related to the
agreements was $342,000 and $243,000, respectively. During the years ended
December 31, 2002, 2001, and 2000, total cash payouts pursuant to the agreements
totaled $35,000, none, and none, respectively.
Note 12. Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
--------------------------------------
2002 2001 2000
--------------------------------------
Currently paid or payable .............. $1,581,000 $1,478,000 $1,776,000
Deferred income taxes .................. (37,000) (45,000) (177,000)
--------------------------------------
$1,544,000 $1,433,000 $1,599,000
======================================
40
Income tax expense differs from the amount computed by applying the federal
income tax rate to income before income taxes. The reasons for this difference
are as follows:
Year Ended December 31,
----------------------------------------------------------------
2002 2001 2000
------------------- ------------------- --------------------
% Of % Of % Of
Dollar Pretax Dollar Pretax Dollar Pretax
Amount Income Amount Income Amount Income
----------------------------------------------------------------
Computed "expected" income tax
expense ......................... $1,790,000 35.0% $1,692,000 35.0% $1,806,000 35.0%
Effect of graduated tax rate ...... (51,000) (1.0) (48,000) (1.0) (52,000) (1.0)
Tax exempt interest and dividend
income, net ..................... (308,000) (6.0) (316,000) (6.5) (324,000) (6.3)
State income taxes, net ........... 169,000 3.3 159,000 3.3 170,000 3.3
Increase in cash surrender value of
life insurance contracts ........ (64,000) (1.2) (60,000) (1.2) (25,000) (0.5)
Other ............................. 8,000 0.1 6,000 0.1 24,000 0.5
----------------------------------------------------------------
$1,544,000 30.2% $1,433,000 29.7% $ 1,599,000 31.0%
================================================================
Net deferred taxes, included in other liabilities on the consolidated balance
sheets, consist of the following components as of December 31:
2002 2001
---------------------------
Deferred tax assets:
Allowance for loan losses .................. $ 546,000 $ 500,000
Deferred compensation ...................... 128,000 91,000
Other real estate owned .................... 33,000 --
---------------------------
707,000 591,000
---------------------------
Deferred tax liabilities:
Securities available for sale .............. (655,000) (509,000)
Bank premises and equipment ................ (116,000) (66,000)
Unrealized bond accretion .................. (47,000) (45,000)
Net deferred loan origination fees ......... (64,000) (37,000)
---------------------------
(882,000) (657,000)
---------------------------
Net deferred tax (liabilities) ............... $(175,000) $ (66,000)
===========================
The change in deferred income taxes was reflected in the financial statements as
follows for the years ended December 31, 2002, 2001, and 2000.
2002 2001 2000
----------------------------------
Provision for income taxes .............. $(37,000) $(45,000) $(177,000)
Statement of stockholders' equity,
accumulated other comprehensive
income ................................ 146,000 336,000 559,000
----------------------------------
$109,000 $291,000 $ 382,000
==================================
Note 13. Earnings Per Share
The following information was used in the computation of basic and diluted
earnings per share:
Year Ended December 31,
-----------------------------------
2002 2001 2000
-----------------------------------
Basic and diluted earnings, net income ... $3,570,000 $3,400,000 $3,560,000
===================================
Weighted average common shares
outstanding ............................ 1,440,466 1,478,220 1,524,473
Weighted average common shares issuable
upon conversion of stock options ....... -- -- --
----------------------------------
Weighted average common
and common equivalent
shares ........................... 1,440,466 1,478,220 1,524,473
===================================
41
Note 14. Commitments and Contingencies
Financial instruments with off-balance-sheet risk: The Banks are parties to
financial instruments with off-balance-sheet risk made in the normal course of
business to meet the financing needs of their customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheets.
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments.
December 31,
----------------------------
2002 2001
----------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit ............... $44,521,000 $40,989,000
Standby letters of credit .................. 2,539,000 1,913,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon and some of the commitments will be sold to other
financial intermediaries if drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each
customer's creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks hold collateral, which may include accounts
receivable, inventory, property, equipment, and income-producing properties,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance with the terms of the agreement with the third party,
the Banks would be required to fund the commitment. The maximum potential amount
of future payments the Banks could be required to make is represented by the
contractual amount shown in the summary above. If the commitment is funded, the
Banks would be entitled to seek recovery from the customer. At December 31, 2002
and 2001 no amounts have been recorded as liabilities for the Banks' potential
obligations under these guarantees.
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $390,000 and none as of December 31, 2002 and
2001, respectively. These amounts are included in loans held for sale at the
respective balance sheet dates.
Concentration of credit risk: The Banks grant commercial, real estate, and
installment loans to customers in the Banks' primary market area which includes
Muscatine and Jefferson Counties in Iowa. The Banks have diversified loan
portfolios, as set forth in Note 4. The distribution of commitments to extend
credit and standby letters of credit approximates the distribution of loans
outstanding. The Banks' policies for requiring collateral are consistent with
prudent lending practices and anticipate the potential for economic
fluctuations. Collateral varies but may include accounts receivable, inventory,
property and equipment, residential real estate properties, and income producing
commercial properties. It is the policy of the Banks to file financing
statements and mortgages covering collateral pledged.
Aside from cash on-hand and in-vault, the Company's cash is maintained at
correspondent banks. The total amount of cash on deposit, certificates of
deposit, and federal funds sold with correspondent banks exceeded federal
insured limits by $30,552,000 and $30,385,000 as of December 31, 2002 and 2001,
respectively. In the opinion of management, no material risk of loss exists due
to the correspondent banks' financial condition and the fact they are all well
capitalized.
Contingencies: In the normal course of business, the Banks are involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
financial statements.
42
Commitments: As of December 31, 2002 the Company has entered into contracts for
construction of a new branch in Muscatine and a remodeling of the main floor of
the existing downtown Muscatine location. The total costs, including the cost of
land and site work at the new branch and equipment for both projects are
anticipated to be approximately $1,500,000 and $500,000 with $499,000 and
$66,000, respectively, incurred as of December 31, 2002. The new branch
discussed above will serve as a replacement for a current rented branch facility
in Muscatine.
Note 15. Related Party Matters
Senior officers and directors of the Company and the Banks, principal holders of
equity securities of the Company, and their associates were indebted to the
Banks for loans made in the ordinary course of business. Such loans are on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with others. As of December 31, 2002, none of
these loans are classified as nonaccrual, past due, or restructured.
The activity in such loans during the years ended December 31, 2002 and 2001 is
as follows:
2002 2001
----------------------------------
Balance, beginning ................... $ 10,355,000 $ 10,049,000
Additions .......................... 8,633,000 5,451,000
Deductions (payments) .............. (5,513,000) (5,145,000)
----------------------------------
Balance, ending ...................... $ 13,475,000 $ 10,355,000
==================================
Note 16. Fair Value of Financial Instruments
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments in the table below:
Cash and due from banks and interest-bearing deposits at financial
institutions: The carrying value for cash and due from banks and
interest-bearing deposits at financial institutions, with maturities of one
month or less, equal their fair values. Fair values of interest-bearing
deposits at financial institutions with remaining maturities of over one
month are estimated using discounted cash flow analysis, using interest rates
currently available for similar instruments.
Federal funds sold: The carrying value for federal funds sold equal their
fair value.
Investment securities available for sale: Fair values for investment
securities available for sale are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
Fair values for all other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Accrued interest receivable and payable: The carrying value of accrued
interest receivable and payable represents its fair value.
Restricted investment securities: The carrying value of restricted investment
securities equals their fair value.
43
Deposits: Fair values for demand deposits (i.e., interest and noninterest
checking, passbook savings, and certain types of money market accounts) are,
by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities of time deposits.
Notes payable and Company obligated mandatorily redeemable preferred
securities: For variable rate notes payable, the carrying amount is a
reasonable estimate of fair value. For fixed rate notes payable and Company
obligated mandatorily redeemable preferred securities, fair values are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on similar borrowings.
Securities sold under agreements to repurchase and treasury tax and loan open
note: For such short-term instruments, the carrying amount is a reasonable
estimate of fair value. The fair value of securities sold under agreements to
repurchase with maturities of over one month is estimated using discounted
cash flow analysis, using interest rates available on similar borrowings.
Federal Home Loan Bank advances: The fair value of Federal Home Loan Bank
advances is estimated using a discounted cash flow analysis, employing
interest rates currently being quoted by the Federal Home Loan Bank on
similar borrowings.
Commitments to extend credit and standby letters of credit: The fair value of
these commitments is not material.
The carrying values and estimated fair values of financial instruments at
December 31, 2002 and 2001 are summarized as follows:
2002 2001
---------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------------------------------------------------------
Financial Assets:
Cash and due from banks ......... $ 17,283,000 $ 17,283,000 $ 14,661,000 $ 14,661,000
Interest-bearing deposits at
financial institutions ........ 1,791,000 1,798,000 1,620,000 1,620,000
Federal funds sold .............. 30,600,000 30,600,000 31,000,000 31,000,000
Investment securities
available for sale ............ 38,095,000 38,095,000 44,466,000 44,466,000
Loans, net of allowance ......... 273,922,000 280,424,000 272,695,000 274,544,000
Accrued interest receivable ..... 2,672,000 2,672,000 2,793,000 2,793,000
Restricted investment securities 3,957,000 3,957,000 3,868,000 3,868,000
Financial Liabilities:
Deposits ........................ 270,422,000 272,292,000 267,524,000 269,207,000
Notes payable ................... 3,300,000 3,336,000 5,419,000 5,561,000
Securities sold under
agreements to repurchase ...... 6,591,000 6,639,000 5,068,000 5,045,000
Federal Home Loan Bank
advances ...................... 64,609,000 67,604,000 70,706,000 73,061,000
Treasury tax and loan open
note .......................... 785,000 785,000 622,000 622,000
Company obligated mandatorily
redeemable preferred securities 4,000,000 4,295,000 4,000,000 4,100,000
Accrued interest payable ........ 580,000 580,000 767,000 767,000
44
Note 17. Parent Company Only Condensed Financial Information
The following is condensed financial information of Iowa First Bancshares Corp.
(parent company only):
BALANCE SHEETS
(Parent Company Only)
December 31,
----------------------------
ASSETS 2002 2001
----------------------------
Cash ................................................. $ 148,000 $ 1,897,000
Investment in subsidiaries ........................... 34,743,000 33,262,000
Other assets ......................................... 236,000 326,000
----------------------------
Total assets ................................. $ 35,127,000 $ 35,485,000
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable ...................................... $ 3,300,000 $ 5,419,000
Subordinated debentures ............................ 4,125,000 4,125,000
Other liabilities .................................. 672,000 659,000
----------------------------
8,097,000 10,203,000
----------------------------
Redeemable Common Stock Held by KSOP ................. 2,717,000 2,242,000
----------------------------
Stockholders' Equity:
Common stock ....................................... 200,000 200,000
Additional paid-in capital ......................... 4,254,000 4,265,000
Retained earnings .................................. 34,195,000 31,944,000
Accumulated other comprehensive income, net ........ 1,101,000 858,000
Less cost of common shares acquired for the treasury (12,720,000) (11,985,000)
Less maximum cash obligation related to KSOP shares (2,717,000) (2,242,000)
----------------------------
Total stockholders' equity ................... 24,313,000 23,040,000
----------------------------
Total liabilities and stockholders' equity ... $ 35,127,000 $ 35,485,000
============================
STATEMENTS OF INCOME
(Parent Company Only)
Year Ended December 31,
-----------------------------------------
2002 2001 2000
-----------------------------------------
Operating revenue:
Dividends received from subsidiaries ......... $ 3,013,000 $ 2,010,000 $ 2,650,000
Management fees and other income ............. 327,000 393,000 275,000
-----------------------------------------
Total operating revenue ................ 3,340,000 2,403,000 2,925,000
Interest expense ............................... 733,000 747,000 482,000
Operating expenses ............................. 700,000 630,000 699,000
-----------------------------------------
Income before income tax (credits),
and equity in subsidiaries'
undistributed net income ............... 1,907,000 1,026,000 1,744,000
Applicable income tax (credits) ................ (425,000) (417,000) (381,000)
-----------------------------------------
2,332,000 1,443,000 2,125,000
Equity in subsidiaries' undistributed net income 1,238,000 1,957,000 1,435,000
-----------------------------------------
Net income ............................. $ 3,570,000 $ 3,400,000 $ 3,560,000
=========================================
45
Note 17. Parent Company Only Condensed Financial Information (Continued)
STATEMENTS OF CASH FLOWS
(Parent Company Only)
Year Ended December 31,
-----------------------------------------
2002 2001 2000
-----------------------------------------
Cash Flows from Operating Activities:
Net income ......................................... $ 3,570,000 $ 3,400,000 $ 3,560,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in subsidiaries' undistributed net
income ......................................... (1,238,000) (1,957,000) (1,435,000)
Investment securities gains, net ................... -- -- (13,000)
Amortization and depreciation ...................... 17,000 15,000 15,000
Changes in assets and liabilities:
(Increase) in other assets ....................... (26,000) (197,000) (8,000)
Increase (decrease) in other liabilities ......... 9,000 (77,000) 82,000
-----------------------------------------
Net cash provided by operating
activities ................................... 2,332,000 1,184,000 2,201,000
-----------------------------------------
Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale -- 1,815,000 23,000
Purchase of securities available for sale .......... -- (1,815,000) --
Capital infusion, Iowa First Capital Trust I ....... -- (125,000) --
-----------------------------------------
Net cash provided by (used in)
investing activities ......................... -- (125,000) 23,000
-----------------------------------------
Cash Flows from Financing Activities:
Repayment of notes payable ......................... (2,119,000) (732,000) (718,000)
Net increase (decrease) in line of credit .......... -- (125,000) 125,000
Proceeds from subordinated debentures .............. -- 4,125,000 --
Cash dividends paid ................................ (1,315,000) (1,309,000) (1,282,000)
Purchases of common stock for the treasury ......... (800,000) (1,227,000) (724,000)
Proceeds from issuance of common stock ............. 153,000 -- 75,000
-----------------------------------------
Net cash provided by (used in)
financing activities ......................... (4,081,000) 732,000 (2,524,000)
-----------------------------------------
Net increase (decrease) in cash .............. (1,749,000) 1,791,000 (300,000)
Cash:
Beginning .......................................... 1,897,000 106,000 406,000
-----------------------------------------
Ending ............................................. $ 148,000 $ 1,897,000 $ 106,000
=========================================
46
IOWA FIRST BANCSHARES CORP.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by this Item is set forth under the caption "Information
Concerning Nominees for Election as Directors" in the Company's 2002 Proxy
Statement, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item is set forth under the captions
"Executive Compensation", "Performance Incentive Plans", "Executive Employment
Agreements" and "Deferred Compensation Agreements" in the Company's 2002 Proxy
Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERHSIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is set forth under the caption "Security
Ownership of Certain Beneficial Owners" and "Information Concerning Nominees for
Election as Directors" in the Company's 2002 Proxy Statement, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Officers and Directors of the Company and its subsidiaries have had, and may
have in the future, banking transactions in the ordinary course of business of
the Company's subsidiaries. All such transactions are on substantially the same
terms, including interest rates on loans and collateral, as those prevailing at
the time for comparable transactions with others, and involve no more than the
normal risk of collectibility.
ITEM 14. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report, management,
including the Company's Executive Vice President, Chief Operating Officer &
Treasurer and Vice Chairman of the Board, President and CEO, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon, and as of the date of that evaluation, management
concluded that the disclosure controls and procedures were effective, in all
material respects, to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and therefore,
no corrective actions were taken.
47
IOWA FIRST BANCSHARES CORP.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed with This Report:
(1) Financial Statements. The following consolidated financial
statements of the Company and its subsidiaries are
incorporated by reference from the 2002 Annual Report to
Shareholders of the Company:
Independent Auditor's Report
Consolidated balance sheets -- dated December 31,
2002 and 2001.
Consolidated statements of income -- years ended
December 31, 2002, 2001, and 2000.
Consolidated statements of changes in stockholders'
equity -- years ended December 31, 2002, 2001,
and 2000.
Consolidated statements of cash flows - years ended
December 31, 2002, 2001, and 2000.
Notes to consolidated financial statements.
(2) Financial Statement Schedules. All schedules are omitted
because they are not applicable, are not required, or because
the required information is included in the financial
statements or the accompanying notes thereto.
(3) Exhibits.
Exhibit Number Exhibit Description
- -------------- -----------------------------------------------------------------------------------------------------------------
(3) Articles of Incorporation, as amended. Incorporated by reference to Exhibit (3) to the registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
(10a) Employment Agreement. Incorporated by reference to Exhibit (10a) to the registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
(10b) Change in Control Employment Agreement. Incorporated by reference to Exhibit (10b) to the registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
(10c) Executive Deferred Compensation Agreement. Incorporated by reference to Exhibit (10c) to the registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
(10d) Director Deferred Fee Agreement. Incorporated by reference to Exhibit (10d) to the registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
(20) Registrant's Proxy Statement Dated March 11, 2003. Exhibit is being filed herewith.
(21) Subsidiaries of Registrant. Exhibit is being filed herewith.
(24) Power of Attorney. Exhibit is being filed herewith.
(99.1) Audit Committee Charter. Exhibit is being filed herewith.
(99.2) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit is being filed herewith.
(99.3) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit is being filed herewith.
(99.4) Code of Ethical Conduct for Principal Officers and Financial Managers. Exhibit is being filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter
of the period covered by this report.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IOWA FIRST BANCSHARES CORP.
Date: March 20, 2003 /s/ George A. Shepley
-------------- ------------------------------------------------
George A. Shepley
Chairman of the Board
Date: March 20, 2003 /s/ Kim K. Bartling
-------------- ------------------------------------------------
Kim K. Bartling, Executive Vice President,
Chief Operating Officer, Treasurer
and Director (Principal Financial and Accounting
Officer)
We, the undersigned directors of Iowa First Bancshares Corp. hereby severally
constitute George A. Shepley and Kim K. Bartling, and each of them, our true and
lawful attorneys with full power to them, and each of them, to sign for us and
in our name, the capacities indicated below, the Annual Report on Form 10-K of
Iowa First Bancshares Corp. for the fiscal year ended December 31, 2002, to be
filed herewith and any amendments to said Annual Report, and generally do all
such things in our name and behalf in our capacities as directors to enable Iowa
First Bancshares Corp. to comply with the provisions of the Securities Exchange
Act of 1934 as amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or either of them, to said Annual Report on Form 10-K and
any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Roy J. Carver, Jr. Director February 20, 2003
- ----------------------- ------------------
Roy J. Carver, Jr.
/s/ Stephen R. Cracker Director February 20, 2003
- ----------------------- ------------------
Stephen R. Cracker
/s/ Larry L. Emmert Director February 20, 2003
- ----------------------- ------------------
Larry L. Emmert
/s/ Craig R. Foss Director February 20, 2003
- ----------------------- ------------------
Craig R. Foss
/s/ Donald R. Heckman Director February 20, 2003
- ----------------------- ------------------
Donald R. Heckman
/s/ David R. Housley Director February 20, 2003
- ----------------------- ------------------
David R. Housley
/s/ D. Scott Ingstad Director February 20, 2003
- ----------------------- ------------------
D. Scott Ingstad
/s/ Victor G. McAvoy Director February 20, 2003
- ----------------------- ------------------
Victor G. McAvoy
/s/ John "Jay" S. McKee Director February 20, 2003
- ----------------------- ------------------
John "Jay" S. McKee
/s/ Beverly J. White Director February 20, 2003
- ----------------------- ------------------
Beverly J. White
49
Section 302 Certification
I, Kim K. Bartling, certify that:
1. I have reviewed this annual report on Form 10-K of Iowa First Bancshares
Corp.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 20, 2003 Signature: /s/ Kim K. Bartling
--------------- --------------------------------
Kim K. Bartling, Executive Vice
President, Chief Operating
Officer & Treasurer
50
Section 302 Certification
I, D. Scott Ingstad, certify that:
1. I have reviewed this annual report on Form 10-K of Iowa First Bancshares
Corp.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 20, 2003 Signature: /s/ D. Scott Ingstad
-------------- ----------------------------------
D. Scott Ingstad, Vice Chairman of
the Board, President, and Chief
Executive Officer
51